Hey Hey Future Homeowners! Are You Ready to ???
Many people start and stop here when they are seeking to buy a home, but as you can see we’re at Day 9 and I’m just touching on credit! It’s a very important step in the pre-approval process, however, managing your money is numero uno; you must have some money saved and your debt-to-income ratios must be on point.
Lenders check your credit to see the likelihood of you paying back your mortgage loan. The thinking is, if this applicant is not paying their 3-figure, 4-figure, or 5-figure debt on time, why should we trust them to pay our 6-figure debt on time???
Having fair to excellent credit is a must!
The type of credit score lenders use is called a Mortgage Industry Option FICO Score. You can see a copy of your mortgage FICO score by visiting www.MyFICO.com. MyFICO.com provides 19 different versions of your FICO Scores there (and there’s 65 versions of FICO and counting!).
Look for your FICO 2 (Experian), FICO 4 (Transunion) and FICO 5 (Equifax) scores.
Breaking Down FICO
I’ve left a pie chart below to show the breakdown of how your FICO scores are calculated.
Let’s discuss each section.
Payment History – 35% – This area has the biggest impact on your scores. It looks at how you are currently paying your credit accounts and how you have paid them in the past. A lender will place more emphasis on what you have done over the past 24 months, versus the past 7 years. For this reason, focus on paying on time EVERYTIME, and reviewing each section of your credit report to ensure it is 100% Accurate, 100% Complete, 100% Consistently Reporting, and 100% Timely. Credit Repair focuses on this section, mostly. Removing the high-priority negative items that are inaccurately reporting from your Payment History will increase your scores.
FREE RESOURCE: Grab a copy of your credit reports from ProCredit.com or IdentityIQ.com and take my 5-Day Credit Report Mastery Course. Each day I’ll go over a section of your credit report and teach you how to read it, understand it, identify errors and more to begin your credit repair journey bit.ly/CreditReportMastery.
Amount Owed – 30% – This section of your FICO scores look at how much of your available credit you have left in comparison to your debt. Although all your credit accounts factor into this section, credit cards hold the most weight. Therefore, to maximize your scores in this area, keep your credit card balances LOW! Here’s an example:
Credit Card 1: $1000 credit limit, $900 balance (1000/900)
Credit Card 2: $1000 credit limit; $80 balance (1000/80)
Credit Card 1 is what you don’t want! You have used up 90% of your available credit.
Credit Card 2 is what you do want. Your debt-to-credit ratio is at 12.5%; anything under 20% of your available credit limit is ideal. When looking to purchase a home, however, I have my clients stay between 1-7% (YES, I said this!!!)
To improve your credit scores in this area:
- Keep your credit card balances super low
- If they are already high, work on paying them down immediately
- Don’t close any unused cards after you pay them off until all credit card balances are at $0, closing them prematurely can drop your scores. FICO scores each individual account’s debt-to-credit ratios as well as all of your accounts combined. If you close the account, it may increase your total debt-to-credit utilization.
- One of the tools that I use to assist my clients with high utilization is Merchant Account Credit Cards. You apply for an east to get approved merchant account, which is known to give out high credit limits. Spend the amount they specify, and they’ll report your high credit limit to all 3 credit bureaus. Use it twice in a 12-month period to keep ‘alive’ in the FICO scoring model and watch your utilization percentage begin to drop as you pay off each card! (For more questions on this, post to the group, there’s a document in the Files Section that describes it in detail).
Length of Credit History – 15% – This area looks at when your oldest account was opened – the account’s status can be opened or closed – and the average age of all your open accounts. The best way to improve your credit scores in this area is to keep your quality, older accounts open. The biggest mistake I see future homeowners make is opening a lot of accounts in a short amount of time. DO NOT DO THIS! It shortens your average age of accounts.
This area affects those who have been managing their credit for a short period of time the most.
New Credit – 10% – When you complete an application for new credit you are giving that company permission to review your credit information; this will result in a hard inquiry being reported on your credit reports. Again, applying for too many new accounts can drop your credit scores, especially if it’s within a short period of time.
The exception is when you are applying for a car, home or student loan. FICO allows you to apply with as many companies as you like as long as it is done within a 14-45-day timeframe. Each application will count as one inquiry.
When you pull your own credit reports, however, your credit scores will not be negatively affected.
Do not be discouraged from applying for new credit. Just make sure that you apply as needed, and not ‘just to see’ or to obtain a 10% discount at your favorite retail store.
Open new accounts responsibly, and make sure you pay on time and keep balances low.
Credit Mix – 10% – This section looks at how well you manage different types of credit accounts. Most people have a mixture of credit cards and installment accounts (home loan, personal loan, car loan) reporting on their credit reports.
Generally speaking, having and paying credit cards and installment loans on time will improve your credit scores. I would not, however, open an account simply to create a good credit mix. FICO scores Credit Mix the least of all five scoring sections. In most cases, opening a new account to simply ‘mix it up’ is not worth it.
*Please visit the files section of The Prosperity Club for free Credit Dispute Letter Templates and other free resources to assist you in Soaring Your Credit Scores!*
If you’re reading this and thinking: “I don’t have any credit, can I still Claim the Keys to My New Home?!”
Yes, but it will require some additional steps. For one, you’ll need to locate a lender that works with FICO’s Expansion Scoring Model. This is when a lender ‘builds’ your credit using non-traditional credit items, such as rent receipts, utility bills, etc. This is often called ‘silent credit’. You’re basically proving that you have a willingness to pay your financial obligations in a timely fashion. FHA is used the most in these circumstances.
If you’re reading this and thinking “I have totally screwed my credit, I can kiss my keys goodbye!” Stop it! This is why lenders have Letters of Explanations and put more emphasis on what you’ve done in the past 12 months, than what you’ve done in the past 3+ years. Did I tell you I’ve purchased properties with foreclosures, bankruptcies and unpaid repossessions on my credit report? Okay, then. That’s why this challenge is about learning to CLAIM your keys; nothing worth having is without effort – a lot of effort!
Assignment – Take the Challenge!
Then, take the free 5-Day Credit Report Mastery Challenge. There, you’ll learn how to break down your credit reports, identify errors, pinpoint areas of improvement, and create a plan of action to Soar Your Credit Scores.
To provide additional resources, check the files section of The Prosperity Club for my Understanding the Basics downloadable, my top tips on How to Soar Your Credit Scores in 30 days or Less, the 5 Consumer Laws You Must Know When Repairing Your Credit, and grab your free copy of The Prosperity Club’s Credit Manual, filled with additional credit-soaring tactics, strategies, dispute letters and more! Yep, the files section of The Prosperity Club is awesome-sauce 😊.
Post to The Prosperity Club 3 areas of your credit that need improvement and strategies you’ll be employing to Soar Your Credit Scores! (If you’re unsure of what strategies to employ, ask! My team will be there to assit.
Feel you need professional assistance to Soar Your Credit Scores? Schedule your Free Credit Consultation here!
See you tomorrow for our final lesson! Wowsers!
Your Partner in Prosperity,
P.S. Here’s that link again to share out >> bit.ly/ClaimMyKeys <<