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Understanding Your FICO Score and How it Affects Home Buying

Home buyers who are seeking a mortgage find out early-on that their credit score plays an important part in the home buying process and in determining the interest rate that a lender offers.

What is a credit score?

A credit score is a number that lenders use to estimate risk. Experience has shown them that borrowers with higher credit scores are less likely to default on a loan.

How are credit scores calculated?

Credit scores are generated by plugging the data from your credit report into software that analyzes it and cranks out a number. The three major credit reporting agencies don't necessarily use the same scoring software, so don't be surprised if you discover that the credit scores they generate for you are different.

Why are credit scores sometimes called FICO scores?

The software used to calculate a great number of credit scores was created by Fair Isaac Corporation--FICO.

Which parts of a credit history are most important?

The pie chart above right shows a breakdown of the approximate value that each aspect of your credit report adds to a credit score calculation. Use these percentages as a guide:

35% - Your Payment History
30% - Amounts You Owe
15% - Length of Your Credit History
10% - Types of Credit Used
10% - New Credit

Your Payment History Includes:

• Number of accounts paid as agreed
• Negative public records or collections
• Delinquent accounts:
  1. total number of past due items
  2. how long you've been past due
  3. how long it's been since you had a past due payment

What You Owe:

• How much you owe on accounts and the types of accounts with balances
• How much of your revolving credit lines you've used--looking for indications you are over-extended
• Amounts you owe on installment loan accounts vs. their original balances--to make sure you are you paying them down consistently
• Number of zero balance accounts

Length of Credit History:

• Total length of time tracked by your credit report
• Length of time since accounts were opened
• Time that's passed since the last activity
• The longer your (good) history, the better your scores

Types of Credit:

• Total number of accounts and types of accounts (installment, revolving, mortgage, etc.)
• A mixture of account types usually generates better scores than reports with only numerous revolving accounts (credit cards)

Your New Credit:

• Number of accounts you've recently opened and the proportion of new accounts to total accounts
• Number of recent credit inquiries
• The time that's passed since recent inquiries or newly-opened accounts
• If you've re-established a positive credit history after encountering payment problems
• In general, checking to make sure you aren't attempting to open numerous new accounts

Credit scoring software only considers items on your credit report. Lenders typically look at other factors that aren't included in the report, such as income, employment history and the type of credit you are seeking.

What's a Good Credit Score?

Credit scores (usually) range from 340 to 850. The higher your score, the less risk a lender believes you will be. As your score climbs, the interest rate you are offered will probably decline.

Borrowers with a credit score over 700 are typically offered more financing options and better interest rates, but don't be discouraged if your scores are lower, because there's a mortgage product for nearly everyone.

Here's an look at credit scores among the US population in 2003:

Up to 499: 1%
500 - 549: 5%
550 - 599: 7%
600 - 649: 11%
650 - 699: 16%
700 - 749: 20%
750 - 799: 29%
Over 800: 11%

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For many people, owning a home brings a sense of pride and freedom that cannot be matched by renting. When you own your own home, you aren’t bound by a landlord’s rules, and your monthly payments are actually building equity. Although buying a home may be the first step you take toward building long-term wealth, it is important to understand the pros and cons of home ownership before taking the plunge.

Advantages of Owning a Home

First, let’s take a look at some of the advantages of buying a home. The most obvious benefit is that it’s yours. You can paint your kitchen pink, change the landscape, install a basketball hoop, or turn your unfinished basement into a movie theater. Provided you work within any building or zoning regulations, you can do almost anything you want with your home.

Another major benefit of owning a home is that some of your monthly mortgage payment comes back to you in the form of equity. When you pay rent, you will never see any of that money again. On the other hand, part of your mortgage payment will partially be applied to the loan principal, which builds equity.

Since your home can become an asset, you also have the potential to make money if you can sell it for more than you originally paid. In some cases, this profit may even be tax-free. In addition, you may be able to tap into the equity of the home while still living in it in order to make improvements or consolidate debt.

Finally, let’s not forget that there may also be additional tax benefits from owning a home. In many cases, the mortgage interest and property taxes you pay are deductible, which means you will be lowering your overall tax burden.

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Words you will hear few real estate agents mutter: Not everybody should own a home! Some people aren't cut out for home ownership, for a variety of reasons. Are you one of those who should rent and not buy? Here are some ways to tell.

Bad Credit Report

Does your credit report tank? If your FICO score is below 620, you're not going to receive a good interest rate for a loan and, in fact, that kind of score could dump you into the hands of apredatory lender. Not a good sign.

• If you want to buy with bad credit, you should work on fixing it before applying for a loan.
• Four late payments is enough to disqualify you from obtaining a loan.
• You can order your credit report free online.

High Debt Ratios

Lenders consider two ratios: front-end and back-end. The front-end is your mortgage payment, plus taxes and insurance divided by your monthly salary. The back-end adds your monthly debt payments to your PITI payment before dividing that total figure by your salary. A 50% debt ratio is a high ratio. A high debt ratio means you may not qualify for the loan. If you should find an unscrupulous lender that is willing to fund such a loan, you may not be able to afford to feed yourself, even if you eat dirt.

Job Instability or Relocation

How secure is your job? A high-rolling Sacramento buyer purchased a home in Midtown. His mortgage payments were $3,500 a month, which was a lot for a 25-year-old. However, that payment was affordable while this guy was earning an annual $120,000 salary. But when he lost his job, he also lost his home to foreclosure.

• Is Your Job in Jeopardy?
  Is your company laying off? Could you be fired and, if so, how hard would it be to get another job right away? Unemployment compensation is rarely enough to cover mortgage payments.
• Relocation.
  Are you likely to be transferred to another city within the next two to three years? If you had to sell due to a job transfer, your property would need to appreciate at least 10% to cover the cost of selling; otherwise, you would lose money on the sale. When you buy a home, you should plan to stay put for a while.

Maintenance Issues

All homes require upkeep and maintenance. Not everybody has the where-with-all, much less the desire, to tackle home repair projects. In addition, many first-time home buyers can not afford to hire a professional to fix things that break. Experts suggest you set aside 5% of the purchase price to cover maintenance and repairs when you buy a home.

When Renting Costs Considerably Less

If your mortgage payment would be triple the amount (or more) you would pay for rent, it might not make financial sense for you to buy. For example, if it would cost you $2,000 a month to rent what would cost you $6,000 per month to own, does it make sense to pay $48,000 a year more to own a home?

If you are in a 30% tax bracket, you might not come close to recouping the difference you paid. Say your deductible expenses are $5,000 a month; 30% of that is only $1,500, which would be your true tax savings per month. Would you spend $6,000 to save $1,500? For more information, please consult a tax accountant or CPA.

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Even though there are many positive aspects to buying a home, let’s not overlook the potential drawbacks as well. Do you remember a time when a major appliance in your apartment broke down? You probably just had to call your front office or landlord and they were out to fix or replace it at no cost to you within a matter of hours or days. When you own your own home, there may be many unexpected repair and maintenance costs that you otherwise wouldn’t have if you were renting.

Another thing to consider is the potential to actually lose money on the house. While over time real estate has generally gone up in value, there are times when the real estate market stays relatively flat or actually declines. Depending on the costs associated with the sale and the actual amount you sell the house for, you could lose money.

Finally, buying a home is a long-term proposition. When you rent, you may only be bound to a month-to-month or annual lease, so picking up and moving can be done on relatively short notice. Once you buy a home, it isn’t as easy to just pick up and move. You have a significant financial obligation, and the process of selling a home may take several months to complete.

So, when you are buying a home, take the time to understand the benefits and drawbacks, and make sure you are doing it for the right reasons.

Determine How Much Home You Can Afford

If you have decided that buying a home is right for you, the first step is to determine what you can afford. One of the common guidelines to use is the debt-to-income ratio. Most lenders suggest that your total debt-to-income ratio should not exceed 36%, and your mortgage debt alone should be less than 28% of your monthly income.

To calculate your personal debt-to-income ratio, first add up your total monthly gross income. Once you have that figure, multiply it by 36%, or 0.36. This number is the maximum amount of monthly debt payments you should have, including your mortgage.

Next, add up all of your current monthly non-mortgage debt payments and subtract it from the previous total you just calculated. This number will give you an approximate maximum mortgage payment you can afford. Ideally, this amount should be 28% or less of your monthly income.

Even with these guidelines, it is important to remember that your personal situation will ultimately dictate what you can truly afford, so take all aspects of your situation into consideration.

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In these difficult economic times many families do not know when they may face the loss of an income. Most families today rely on two incomes and when one of those sources of income is lost, it can have a serious impact on the entire family. A source of income could be lost for many different reasons. A payday loans online is designed to help in situations when you are facing a financial emergency that is short term in nature.

Some of the reasons why an income may be lost in a family include temporary illness or disability, a temporary layoff from one's place of employment or a permanent layoff. Until the situation can be resolved or until another job can be found, you may find it difficult to cover all of your regular expenses with one income. Even if you receive unemployment compensation or worker's compensation, this may not be enough to fully cover the amount of lost income. As a result, it can be difficult to cover all of your monthly expenses such as mortgage or rent, vehicle payment, utilities, insurance and groceries. During such times, it can be a relief to know that you can rely on a payday loan to borrow money during a short term emergency.

When you are facing such a short term emergency it may be possible to resolve the situation by finding part-time employment or by finding another job. The reason that resulted in the problem may also be resolved fairly quickly. Until then you will need to find a way to cover all of your expenses. A payday loan can do this. You can apply for a payday loan and receive funds that you need quickly. This is an important point to consider. In most short term emergency situations you will not have time to wait a week or more to obtain the funds needed to cover your expenses. Through a payday loan, you do not have to sit around and wait. The money can be in your hands rapidly, allowing you to pay your bills and expenses.

Being approved for a payday loan is not as difficult as many people imagine it to be. Applying for a payday loan is not the same as applying for a traditional bank loan. Consequently, it is often much easier for many people to become approved for a payday loan. There is never a need to stress out over a shortfall of money during an emergency when it is possible to apply for a payday loan. DONOTCHANGE