Your FICO score is a main determinant of whether you will be approved to purchase a home or not.
What is a FICO score?
A FICO score is a calculation derived from different data in your credit report that determines your risk in receiving credit.
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Types of credit used
Each of these five categories provide important information that help determine a FICO score.
Once you understand what the main categories are in determining your FICO score, the next step is managing your credit so you can improve your score and eliminate debt.
Here are tips to fix your credit score by category and maintain good credit:
- Pay your bills on time
In order to build a strong credit score, you need to be current on all bills and avoid delinquencies. Even if you are a couple of days late, it will still negatively affect your credit score. If you have been late on a payment, start today and become current on all bills. You need to start building consecutive months where you are on time with all payments.
- Pay collections accounts
According to the FICO website, you need to be aware that paying off a collection account will not immediately remove it from the credit report. A collections account will be reflected on your credit score for 7 years.
- Keep low balances on credit cards and other “revolving credit”
You never want to max out a credit card, or become close to reaching the limit. A good rule of thumb is to never exceed half of your credit limit. Creditors want to see that you can manage credit and don’t max out ever credit line you receive.
- Pay off debt rather than moving it around
Paying of your credit cards is the most effective way to improve your credit score. When you are paying of a credit card, don’t keep using it as this is counterproductive.
- Don’t close unused credit cards as a short-term strategy to raise your score
This does not improve your credit score.
Length of Credit History
If you are trying to build your credit and have been managing it for a short time, you don’t want to open several new accounts rapidly. When consumers open too many cards too soon, it can appear risky and lower your score.
- Re-establish your credit history if you have had problems
In this economy there are numerous people who have ruined their credit due to financial hardships or other circumstances. One of the most important things when trying to improve your credit after a hardship is to re-establish credit by opening new accounts and showing stability. This will take time but in the long-term managing a new account responsibly will raise your score.
Types of Credit Use
- Have credit cards- but manage them responsibly
Credit cards are not the problem, the lack of control and irresponsibility from consumers that is the problem. Having a credit card is okay as long as you are making timely payments, preferably in full each month.
When buying a home with financing, you typically need a minimum of three credit lines to qualify. This may be a car loan and two credit cards. If you are paying those on time and managing responsibly, you will be raising your score.
- Closing an account doesn’t make it go away
A misconception that is often thought by consumers is closing a credit card will remove it from your report. This closed account will still show up on your credit report and can sometimes still be considered in the FICO score.
If you are looking for a better deal to come along with a home purchase, you probably won’t find a better deal than now. Home prices are at their lowest and are combined with extremely low interest rates.
According to an article on CNN, home prices have dropped 34% nationally since 2006. This is mind blowing how drastically the market changed. Combining that with historic low interest rates, you cannot create a better deal.
A chief economist for PNC Financial Services, Stuart Hoffman, said he expects home prices to flatten out by the third quarter and start climbing by next year. Hoffman also listed a few things that will help improve the housing market, and increase home prices.
Two factors are the decline of the number of foreclosures as well as a continued job growth. In addition, people are getting their finances in order, improving their credit score and gaining more access to mortgages as they improve their financial situation.
All of these factors will help contribute to improving the housing market and leading to increased prices.
So for all the home buyers on the fence of waiting to purchase in hopes of receiving a better deal, you most likely won’t find one. The market is the most affordable right now!
However, for those unable to purchase until 2013, don’t fret. Economists are predicting a 2% increase in home prices, which still leaves home prices at an affordable amount. The only thing we can’t predict is the interest rates since they are fluctuating on a daily, even hourly basis.
With summer approaching, it’s the best time to house shop. It’s warm outside so you don’t mind going out to look at homes. It also gives you a better idea of what the neighborhood is like with people outside being active on the weekends. Hopefully lawns will be looking much better after the winter and cold seasons are done. Spring and summer are the busiest times to house shop.
So as of today, now is the best time to purchase a home because you are combining low interest rates, low home prices and summer time to shop and purchase!
Why is spring the time to buy? Right now home prices are low, extremely low! It’s actually crazy the amount of home one can purchase, in comparison to 2006 before the crash. Buyers have such power right now in this market, and should choose to take advantage of it.
The interest rates are low, which increase buyers’ power even more. Low interest rates help keep your monthly house payment low as well.
The spring and summer are the busiest times for real estate purchases. According to Forbes, “April, May, June and July account for more than 40% of all housing transactions annually, in large part thanks to weather.”
The demand for buying has increased, which has actually lowered the amount of inventory on the market by 19% in comparison to last year’s inventory levels.
Buyers should not be on the fence about jumping into the market and purchasing a home. Prices are low, and if you are waiting for prices to get lower, then you are playing with fire. While waiting for prices to drop further, you could risk interest rates increasing. We have a brief video from a while back that explains how those two situations affect your buying power.
There is also a rising trend of confidence in the housing market. Home builders are already signing contracts to start building new homes again. This shows an improvement in the housing market, and that we are rising out.
What makes spring the best time to purchase a home? There are a few reasons why.
In warmer weather, buyers are more willing to look at houses and go shopping. It’s not fun to browse homes in the rainy, cold weather. When the sun comes out, so do the buyers.
New foreclosure sales will be released on the market that had been delayed. We may also see more short sales and bank owned properties become available. Investors have been purchasing a good portion of these homes using cash, approximately 30% of the available inventory.
Improving Job Market
When the job market is doing well, it in turn benefits the housing market. Each one affects the other. When the job market does bad, that’s when we see spiral down turns. But it seems we are rising above that.
So yes, spring is a great time to purchase a home! Get ahead of the other home buyers and take advantage of the inventory available.
Would you buy a home if you could afford the down payment?
This new program called California Homebuyer’s Downpayment Assistance Program (CHDAP) just may be what you are looking for!
The new California Homebuyer’s Downpayment Assistance Program (CHDAP) is designed to help first time homebuyers who have low-to-moderate income purchase a home.
How Does The Program Work?
When you purchase a home through FHA you have to put 3.5% down on whatever the sales price is for your home. For example, if you purchased a $200,000 home, your down payment would be $7,000.
Well with this new program, first time homebuyers only need to bring in 1% of the purchase price. That is 0.5 percent for the down payment and 0.5 percent for the closing costs.
Using our previous example, for a $200,000 home, $2,000 is needed for a down payment from the buyer. The additional $5,000 that would have been needed with FHA, is now being placed as a second mortgage.
Under this program the buyer will have a first mortgage of $198,000 ($200,000 minus $2,000) and then a second mortgage of $5,000 for the “gift” as a down payment.
With CHDAP, the second mortgage does not need to be paid. It is required to only be paid if the buyer decides to sell the home or refinance. Otherwise it is known as a “silent mortgage”. However, we advise homebuyers to pay the second mortgage as well. In this scenario it is approximately $30 more a month to pay both mortgages.
- To be eligible for the CHDAP homebuyer’s assistance, you MUST be a “First Time Homebuyer”. This means that the borrower cannot have owned a home in the past three years.
- The home purchased by the borrower must be the primary resident
- The borrower will need 3 current consecutive years’ tax returns
- The property must be owner occupied for the term of the loan or until the property is sold.
Borrower’s Income Limits
There are income restrictions for the CHDAP program because it is designed to help those with low-to-moderate income.
The income limits vary on what county the home is being purchased in addition to the number of dependents.
Example for Southern California Areas using FHA as first mortgage:
Borrower’s Down Payment Contribution
The borrower is required to pay from their own funds a minimum of 1% of the loan amount or $1,000 (whichever is greater).
Borrower’s Credit Requirements
A typical credit requirement for a FHA mortgage with a LTV of 95% (meaning you are financing 95% of the home) is 640.
Any loan that is financing 95.01-100% of the home with CHDAP will have different credit requirements.
Properties Allowed For Purchase
- Single Family Units
- Agency Approved Condominiums
- Planned Unit Developments (PUDs)
- Five Acres Maximum
- Flips (ONLY 91+ days or more)
If you are a first time homebuyer, don’t miss out on this great opportunity using the California Homebuyer’s Downpayment Assistance Program.
Not knowing how much you can afford to pay for a home before you make an offer.
You can avoid this mistake by going through the process of getting pre-qualified and then pre-approved with a mortgage lender. You will then receive a certificate of eligibility to go house shopping and make offers with your realtor.
Not finding out in advance who the real estate agent represents.
This mistake can be avoided by….Asking your realtor! People think their agent is working for them, but unless the agent is working as your buyer representative, then he or she are representing the seller.
Not realizing that the wrong mortgage can cost thousands of dollars in unnecessary interest and taxes.
This mistake can be avoiding through consulting with a mortgage consultant before making a final decision on which mortgage to choose. You can never ask too many questions in the home buying process.
Not looking for hidden defects before buying a home.
A home inspection should always be conducted by a professional before purchasing.
Not knowing how your debt can affect your ability to buy or refinance a home. Be 100 percent honest about your debts when buying a home. You need a good credit profile in order to purchase a home, so start working on it a year in advance of when you want to buy. Speak with a mortgage professional to help give you guidance and improve your credit.
Also, on a side note, if you are in the process of buying a home, DO NOT add any new debts to your credit! Don’t open credit cards, don’t buy a car, don’t do anything until your transaction has closed and you have the keys in your hand.