First Time Home Buyer FAQ: What Makes Up My Credit Score?
Every first time home buyer will have to understand their credit score before going house hunting. In fact, anyone looking for a loan of any kind will be affected by their credit score. Your score will give you access to financing for a house, a car, college tuition, store credit and more. A higher score will put you in a lower risk category of borrowers. A lower score will lead to higher interest rates and fees. So it’s important to understand what goes into a credit score.
On-Time Payments: 35%
Paying bills on time has the biggest effect on credit scores. Late payments and judgments have a major negative impact. Recent delinquencies (in the last 2 years) carry more weight than older items. During the mortgage process, every point can affect your interest rate. Be sure to discuss any financial move, like paying off debt, with your mortgage consultant.
Capacity Used: 30%
Also called a debt ratio, this is the outstanding balances on your credit lines. It marks the difference between your available credit and how much you’ve used. Keeping the outstanding balance below 30% of the maximum is key when considering a mortgage in the next 6 months or less.
Length of Credit History: 15%
Lenders want to see a track record of credit history. A longer history of solid payments and credit makes you a stronger borrower.
Types of Credit Used: 10%
Just like you want a diverse investment portfolio, a mix of credit is desirable. A mix of auto, credit cards and mortgages is better than just credit card debt.
Past Credit Applications: 10%
Inquiring on your credit report often can impact your score. In the span of a year, each inquiry (up to 10) can impact your score as much as 5-to-30 points, depending on the credit reporting service. So it’s good to wait on pulling credit until you’re ready to act. However don't be too concerned when you're shopping around for the best rates. Similar institutions pulling your credit report will have little-to-no effect on your FICO score.
Take a look at the free guide "The Road to Mortgage-Ready Credit" for more information on credit scores and how to get yours ready so you can become a first time home buyer. Get your free copy at the button below.