A buyer’s credit score plays a major role when it comes to buying a house. The credit score dictates the interest rate for the borrower. However, the rules of the game have changed, since FICO recently made some changes on how credit scores are measured. If you’re looking to buy a home in the near future, here’s what you need to know about how the new credit score updates affect today’s homebuyers.
REVIEW ON CREDIT SCORES
Your credit score is the basis of qualifying for different loan options. Depending on the type of loan, lenders will vary on the minimum score they will require. Some may require a minimum score as high as 640 (conventional loans), while others will accept scores as low as 500 (several FHA loans).
The credit score also has a great impact over the costs of your loan. The reasoning behind this is that the score represents the borrower’s level of risk to a lender. A higher score shows you pay your bills on time, and reflects your are a good risk to loan to. This translates into qualifying for lower rates on your loan.
A lower score means you are considered a higher risk, which equals higher rates on your loan. That’s why most lenders compensate for the risk involved by raising the interest rates in cases where the borrower shows more of a chance of defaulting on the rloan.
According to FICO, they built a new suite(FICO Score 10) for scoring models that will be available from all three credit reporting agencies (Experian, TransUnion, and Equifax) to lenders by the end of 2020. These changes will be treating default payments and debt more severely. This also includes consideration over any credit card balances and payment amount history.
FICO will still retain its scoring models i.e. payment history, dollar amount owed, age of credit history, credit mix and new credit accounts. However, the new scoring system introduces a new factor, giving lenders a more precise assessment of a borrower’s credit risk.
According to their press release on January 23, 2020, the lender could “…reduce the number of defaults in their portfolio by as much as 10% among newly originated bank cards. The reduction in defaults is even higher for newly originated mortgage loans at 17%”.
In other words, this gives great consideration over a borrower’s trended data. This data offers a closer look at your financial status over the last 2 years, especially on how you’ve managed your existing accounts. This data wasn’t normally shown to mortgage lenders for the purpose of buying a home. But now, this might prove to be a challenge for homebuyers who have been negligent towards how they manage their finances.
Another area where this new FICO 10 suite will change things is when it comes to refinancing. If you managed to buy a house two years prior, when interest rates were higher, your score could get a boost under this new scoring model, if you’ve been making payments on time every month. This means you will be able to refinance at a lower rate.
HOW TO KEEP UP WITH THE NEW CHANGES
Although there have been changes to the scoring model, the ways to maintain a strong credit score still remain. To keep your credit score high, or to improve it, do the following:
Pay Bills On Time
Payment history is one (if not the most important) factor when it comes to your credit score. Being consistently a month late on your payments could deal a massive blow towards your score. Try to set up autopay options, or reminders to avoid late payments.
Avoid Cancelling Credit Cards
Contrary to popular belief, closing your credit accounts can negatively affect your credit score. When it comes to credit cards, it would be advisable to hold on to them for a long time. This gives you a more established credit history in the end.
Review Credit Reports
Checking your credit score through your bank does not affect it whatsoever, since it’s more of a soft inquiry. Try to look for indications of any errors that might drag your score down. You are entitled to at least ONE free credit report from your respective credit bureaus (Experian, TransUnion, Equifax) every 12 months.
Be Wary Of Credit Utilization
Credit utilization is the amount of credit you use, compared to the credit limits. The amount available accounts for 30% of your credit score. With that being said, you shouldn’t use more than the recommended percentage. It’s best to keep your credit card balances at 50%, or lower, of the credit limits. It’s known that borrowers who fall within the highest credit score range tend to carry much less than 30%. To achieve this, you can set balance alerts whenever possible, or make extra payments during the month.
Keeping up with home buying trends can be overwhelming for first time and seasoned buyers alike. You might’ve found the right home, but might end up struggling to secure a loan to complete the purchase. Being informed in the ever-changing real estate market is key. Working with professionals will help you be on top of the current trends. Our team at Strategy Properties have in-depth knowledge of the home buying process, while keeping up with the latest trends in the business. To learn more about our services, contact us at (734) 224-5454 or you can reach out to us via email at firstname.lastname@example.org.