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| Financing and Mortgage |
Payment History: The first thing any lender would want to know is whether you have paid past credit accounts on time. This is considered one of the most important factors in a FICO® score, accounting for approximately 35 percent of your FICO® score.
Amounts Owed: The number of accounts with balances represents approximately 30 percent of your FICO® score. Note that even if you pay off your credit cards in full every month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.
Length of Credit Used: In general, a longer credit history will increase your FICO® score. However, even people who have not been using credit long may get high FICO® scores depending on how the rest of the credit report looks. Credit history accounts for approximately 15 percent of your FICO® score.
New Credit: The FICO® score considers how many new accounts you have by type of account. It also may look at how many of your accounts are new, how long it has been since you opened a new account and the length of time since credit-report inquiries were made by lenders. Re-establishing credit and making payments on time after a period of late-payment behavior will help to raise a FICO® score in time. Your new credit accounts make up 10 percent of your FICO® score.
Types of Credit Used: Approximately 10 percent of your FICO® score is based on your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Your FICO® score also takes into account the kinds of credit accounts you have. Have you had experience with both revolving and installment accounts, or has your credit experience been limited to only one type? Your FICO® score also looks at the total number of accounts you have of each kind. For different credit profiles, the appropriate number will vary depending on your overall credit picture.
According to Fair Isaac Corporation, a FICO® score takes into consideration all these categories of information, not just some of them. Lenders also look at other factors when making a credit decision, including your income, how long you have worked at your present job and the kind of credit you are requesting.
Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO® credit score.
Other tools and resources: Visit www.myfico.com and select credit calculators to compare loans, determine mortgage payments, whether a fixed- or an adjustable-rate loan makes sense, determine closing costs and whether renting or buying is the better option.
SAVING FOR THE DOWN PAYMENT
It is recommended to pay about 20 percent or more of the cost of the home for the down payment. This is known as 80 percent loan-to-value (LTV) ratio. If you put down less than this you will be required to pay private mortgage insurance (PMI), which protects the lender in the event you default on the loan. PMI is not tax deductible and can cost anywhere from $25 to $65 per month for a $100,000 loan and is determined by the size of the down payment, the type of mortgage and amount of insurance. Monthly PMI is paid with the mortgage. Under the federal law the lender is required to cancel PMI once the LTV ratio reaches 78 percent (when your mortgage amortized to 78 percent of the original value of the house). The borrower must be current on all mortgage payments and the lender must tell the borrower at closing when the mortgage will hit that 78-percent mark.
GETTING YOUR LOAN APPROVED
Being preapproved by a lender can put you in a much stronger negotiating position because it shows the seller that you are a qualified, ready-to-buy buyer, financially capable of buying the property and more likely to close on the property. Getting preapproved also allows you to understand your financial condition and how much you can afford before you begin your home search.
Preapproval is different from prequalification, which is merely an estimate of what you may be able to afford. Preapproval occurs when the lender has reviewed your credit and believes that you can finance a home up to a specific amount based on collected preliminary information. However, neither preapproval nor prequalification represents or implies a commitment on the part of a lender to actually fund a loan. Following are some of the current documents you’ll need to get started:
Income
Assets
Debts or loan statements
ANTICIPATING YOUR COSTS
Review the following information to anticipate your costs involved in buying a home. This is only a partial list. For more detailed costs, ask your real estate agent to help you create a worksheet that can be updated as necessary.
Amounts Owed: The number of accounts with balances represents approximately 30 percent of your FICO® score. Note that even if you pay off your credit cards in full every month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.
Length of Credit Used: In general, a longer credit history will increase your FICO® score. However, even people who have not been using credit long may get high FICO® scores depending on how the rest of the credit report looks. Credit history accounts for approximately 15 percent of your FICO® score.
New Credit: The FICO® score considers how many new accounts you have by type of account. It also may look at how many of your accounts are new, how long it has been since you opened a new account and the length of time since credit-report inquiries were made by lenders. Re-establishing credit and making payments on time after a period of late-payment behavior will help to raise a FICO® score in time. Your new credit accounts make up 10 percent of your FICO® score.
Types of Credit Used: Approximately 10 percent of your FICO® score is based on your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Your FICO® score also takes into account the kinds of credit accounts you have. Have you had experience with both revolving and installment accounts, or has your credit experience been limited to only one type? Your FICO® score also looks at the total number of accounts you have of each kind. For different credit profiles, the appropriate number will vary depending on your overall credit picture.
According to Fair Isaac Corporation, a FICO® score takes into consideration all these categories of information, not just some of them. Lenders also look at other factors when making a credit decision, including your income, how long you have worked at your present job and the kind of credit you are requesting.
Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO® credit score.
Other tools and resources: Visit www.myfico.com and select credit calculators to compare loans, determine mortgage payments, whether a fixed- or an adjustable-rate loan makes sense, determine closing costs and whether renting or buying is the better option.
SAVING FOR THE DOWN PAYMENT
It is recommended to pay about 20 percent or more of the cost of the home for the down payment. This is known as 80 percent loan-to-value (LTV) ratio. If you put down less than this you will be required to pay private mortgage insurance (PMI), which protects the lender in the event you default on the loan. PMI is not tax deductible and can cost anywhere from $25 to $65 per month for a $100,000 loan and is determined by the size of the down payment, the type of mortgage and amount of insurance. Monthly PMI is paid with the mortgage. Under the federal law the lender is required to cancel PMI once the LTV ratio reaches 78 percent (when your mortgage amortized to 78 percent of the original value of the house). The borrower must be current on all mortgage payments and the lender must tell the borrower at closing when the mortgage will hit that 78-percent mark.
GETTING YOUR LOAN APPROVED
Being preapproved by a lender can put you in a much stronger negotiating position because it shows the seller that you are a qualified, ready-to-buy buyer, financially capable of buying the property and more likely to close on the property. Getting preapproved also allows you to understand your financial condition and how much you can afford before you begin your home search.
Preapproval is different from prequalification, which is merely an estimate of what you may be able to afford. Preapproval occurs when the lender has reviewed your credit and believes that you can finance a home up to a specific amount based on collected preliminary information. However, neither preapproval nor prequalification represents or implies a commitment on the part of a lender to actually fund a loan. Following are some of the current documents you’ll need to get started:
Income
- Current pay stubs
- W-2s or 1099s
Assets
- Bank statements
- Investments and brokerage-firm statements
- Net worth of businesses owned (if applicable)
Debts or loan statements
- Alimony or child-support payments (if applicable)
- Car or layaway payments
ANTICIPATING YOUR COSTS
Review the following information to anticipate your costs involved in buying a home. This is only a partial list. For more detailed costs, ask your real estate agent to help you create a worksheet that can be updated as necessary.
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