Good Credit: Myths and Facts

When it comes to offering home loans to prospective homebuyers, lenders often provide more favorable terms to borrowers with good credit—because for them, good credit means less risk. Your credit score helps lenders determine the likelihood of whether you will pay your mortgage payments, and pay them on time. The most common credit score is the Fair Isaac and Company score (FICO). A FICO score considers a huge amount of credit history, including how many real estate loans and car loans a person has. It reviews credit card information: outstanding balances, whether you pay your cards off each month, and how close they are to the maximum credit limit. The score also reviews how recently and frequently your credit check has been run, and whether closed accounts were closed based on customer requests or vendor requests.

There are decisions you can make that have the potential to affect your credit score. Here are a few to be aware of.

Oddly enough, just having your credit score checked by a potential lender will affect the score. If you inquire about your own credit, this is called a “soft pull” and it does not affect your score; however, if others check your credit, it may cause a little damage. According to myfico.com, when you apply for credit, you authorize those lenders to ask for a copy of your credit report from a credit bureau. When you later check your credit, those credit inquiries are listed (sometimes along with others). The only inquiries that count toward your FICO scores are the ones that result from your applications for new credit.

Closing old or inactive accounts to help your score could shorten the measured duration of your credit history. This is a bad move. As long as you’ve paid in a timely manner and do not have an outstanding balance, old accounts simply show you have a history of taking care of business. This is good for your credit score. If at some point you got behind and were sent to collections, make sure you clean up those negative accounts. Unfortunately, paying off a negative account doesn’t erase it from your record (it usually remains on file for seven years), but it is far better than allowing it to continue to harm your financial reputation.

If you have a grown son or daughter (or any friend or relative) who may have had some credit trouble, be aware that if you co-sign on a loan for them, you are responsible for that account. If they default on the loan, the bank will come to you for payment. I realize this may sound obvious, but some folks are under the misimpression that co-signing is like a vote of confidence that makes the lender feel good about lending to this high-risk borrower. It is far more:  it is a financial guarantee that you may actually have to make good on in the future. And if your friend doesn’t pay on time it may impact your credit score.

As you consider how to build a strong credit score, making on-time rental, utility and cell phone payments isn’t actually all that helpful. It’s a good idea, anyway, but what really helps your credit score is not getting sent to collections for missed payments. While your score will incorporate your financial history, it is only a snapshot. It is like a home appraisal – its value is only good for that point in time. The good news about this is: if your credit score is not as high as you’d like, you can change it. The bad news is: if it is as high as you’d like, it may not remain there.

 

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

 

 

Here are a few answers to common real estate questions

How Can I Put Zero Cash Down And Still Buy a House?

Sometimes people make enough money to pay a monthly mortgage payment, but just can’t seem to save up a down payment. If that’s the case, there’s still hope. Both the United States Department of Agriculture (USDA) and Federal Housing Authority (FHA) provide home loans with little or no down payment required.

Is it weird that the Agriculture Department is one of the biggest lenders? Kind of. Is it another sign of government inefficiency that two federal programs compete? I’d say yes, but that’s just my Libertarian side jumping in.

So, to figure out if you qualify for a no-down-payment loan, make an appointment with a mortgage broker with all your financial information: income, employment history (length on the job and in the industry), credit information, available cash for a down payment, closing costs, reserves, and a potential co-signer or guarantor for a loan.

Under the right circumstances, you may be able to get a loan with zero out of pocket. This happens when you combine a low-down-payment loan with credits from the seller for non-recurring closing costs, cases where the purchase price is high enough to offer credit back toward the buyer (up to 6 percent), and that money is used as the cash requirement at closing.

What’s Mortgage Insurance?

Mortgage insurance is insurance that can help reduce the amount of a down payment by providing security that the monthly mortgage payment will be made. There are two types: MMI and PMI (mutual mortgage insurance and private mortgage insurance) – they behave the same way.

What’s an Escrow Account?

An escrow account is where money goes as it’s being exchanged between buyer and seller. It includes five elements:

  1. Interest
  2. Principal
  3. Mortgage insurance
  4. Impound for property taxes (the pint of blood we all must donate to our local government)
  5. Impound for insurance

Impounds are used by a lender to accumulate money to pay property taxes and insurance (like a savings account controlled by the lender for the sole purpose of paying the property tax and insurance).

Should I Get Pre-Approved for a Loan?

One of my first real estate columns covered this topic in some detail, but the quick answer is: yes, get pre-qualified. Better yet, get pre-approved. Sometimes people confuse having a good credit score with getting pre-approved. While it helps, many other factors are involved in a lender’s decision regarding a loan:

  1. Total income
  2. Length of time on the job and in the industry
  3. Debt-to-income ratio
  4. A more detailed credit review than just a FICO credit rating.

Once a loan broker reviews all this material, they will consider providing a pre-qualification or pre-approval letter, depending on the source of the information. Your heartfelt promise isn’t as secure as documents proving your credit worthiness. In a situation where multiple buyers are making offers on the same property, the one who is pre-approved will often be chosen.

What are the Differences Between a 15- and 30- Mortgage?

Apart from the obvious—15 years—the term (length) of the loan affects the rate. The pre-approval letter will determine the monthly payment the bank will approve. The amount of the loan will vary based on that amount. A variable rate loan will start with a rate that is lower than a fixed rate would be, so you’ll qualify for a bigger loan. With a 15-year loan, the rate will be lower but the payment will be higher (short term means less risk to the lender, thus the lower rate, but paying off the cost of the loan in 15 years instead of 30 means each payment will be higher).

If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.