The Importance of Knowing Your Credit Score

Filed under: Market Comentary

credit scoreEvery potential home buyer knows the importance credit scores play in getting a good interest rate on a mortgage or qualifying for a mortgage at all.

Knowing your credit score is vital to understanding where you stand in getting a mortgage with a low-interest rate, as well as giving you an incentive if you need to raise your score , manage your credit cards, and/or pay off any old collections.

Finance guru Jack Guttentag recently talked about a variety of scenarios that should help any potential home buyer understand what he or she may need to do when it comes to credit scores.

Guttentag mentions that the range of credit scores in most models is between 300 and 850. If you have a credit score under 620 you will be considered “sub-prime,” while if your score is below 450, it will be almost impossible to get a mortgage loan.

Having a score above 620 is crucial, and Guttentag suggests that if you have 18 months to improve your score, it will definitely be beneficial. In 18 months, according to Guttentag, you could possibly raise your score to 660, which will drop your interest rate dramatically. And, if you have a score of 680, in 18 months, you could possibly raise your score to 720,which will again drop that interest rate.

Guttentag notes that credit scores are calculated from mathematical models and that different models will bring about different scores so your target credit score should include a “margin of error” of at least five points.

As far as managing credit cards, Guttentag says that delinquent payments will definitely reduce your score and that eliminating the delinquency will not restore your score, but just prevent further decline.

Because of this, he suggests that you aim for low “utilization ratios,” below 33% on all of the credit cards you have. In addition, it a good rule of thumb to not have too many credit cards, or too few. Having 4-5 cards that you actively use is fine, but remember that having a department store credit card will reduce your score.

Guttentag also says that you should pay off any old collection account before even thinking about applying for a mortgage, as a lender will not accept an unpaid collection account that appears on your credit report.

Being fully aware of your credit score and what is on your credit report is highly beneficial to you if you are looking into qualifying for a mortgage.

If you have any questions about the mortgage industry or if you are in the market to buy or sell, please give me a call and we can discuss what is on your mind.



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