Dave,
We are starting the process for looking for a new home. We are currently renting, but have decided that the interest rates and home prices are attractive enough to lure us into home ownership. We filled out an application from a lender online and found out our credit score is only 674, we thought it would be much higher as we are not aware of any missed payments etc.. in the past. We thought it would be easier to get a loan than it appears it is going to be. We both have good jobs and have held them for several years and do not understand why our credit score would not be higher. Can you fill us in on why our credit score might be low and what we can do to get it higher so we can qualify to get a new home? Looks like, from checking on line, we need a credit score around 700 to get qualified for a new loan, is this a typical qualification standard? Thanks for your help and advice.
Troy and Jennifer, Orchard Mesa
Troy and Jennifer,
Sounds like you are headed in the right direction, with one small detour, I would recommend you stop filling out forms online and go to a reputable local lender and sit down with a loan officer who can help you evaluate your financial capabilities and help you put together a strategy for getting your credit score in better standing and get you into a good loan, while rates are still attractive. It sounds to me like a 674 credit score is “pretty good” and should not preclude you from buying, so I posed your question to one of our trusted resources, James Pulispher, Regional VP at Fidelity Mortgage and he agrees.
“There are two basic loan types. FHA and Conventional. The Conventional type of financing is much more credit sensitive than the FHA financing. It may be that an FHA loan would be the best option in this scenario. A conventional loan would likely still allow financing, depending upon what was on the credit, but might simply charge a higher rate of interest in order to provide the financing. As a general rule you must have a 620 or better to obtain financing, which this particular buyer certainly does have.”
James also points out, “Many internet lenders have over‑layed the credit standards that exist, allowing them to only deal with the top tier customers. This customer would certainly have viable financing options when dealing with a local lender, and should not be discouraged about buying.” The internet can be a good thing, but does not replace your local expert’s advice. By establishing a local lender, that you can trust and can count on, you will put in place an important piece to your long and short term financial needs.
According to James, your credit scores looks at many things. “One item that can influence credit scores is the utilization of credit. 35% of the credit score takes into account what percentage of available credit is owed on revolving accounts. (ie. credit cards) The lower percentage of available credit that is owed, the better the score will be. This customer may have paid all bills on time, but may owe close to the limit. This could lower the credit score. That doesn't necessarily create negative credit, but does lower the score.” As you can see, your credit score can be impacted by many things, but also having a “go-to” person to discuss these issues with can literally be a life saver.
To get your score up, continue to pay your bills on time and try reducing some of your debt burden. By reducing your debt burden, I mean pay down some of your revolving accounts that can lower your debt to income ratio which will in turn raise your score. Remember, one or two missed or late payments can cause your credit score to drop up to 10% and it can take a year or longer to get it back up.
This Ask Dave column should be entitled, Ask James, but it is all good and relevant information for any home buyer or consumer who really does not understand the world of credit scores. We throw the term “credit score” around loosely and many times do not fully understand what it is or what impact it really can have on our financial picture and purchasing ability! Hope this helps and happy house hunting! : )
Dave Kimbrough
The Kimbrough Team
