First Time Home Buyers don't commit credit score suicide
First Time Home Buyers don't commit credit score suicide
First time home buyers 5 easy steps to kill your credit score
First time home buyers in today's market have an incredible opportunity. Affordable prices, sub-5% interest rates, and very attractive down payment assistance programs are all waiting for qualified first time home buyers.
The key word here is "qualified".
Lenders in this last housing boom literally went STUPID when it came to approving home loans. In complete disregard for prudent lending standards, we offered stated income and asset loans, we had NINJA loans (no income-no-job-or assets). There were even rumors of a Stated FICO loan.
To obtain a first time home buyer loan in today's market doesn't require perfect credit, but credit score requirements are tighter, and it can be "credit score suicide" if you aren't careful in managing your credit.
Why it's important for first time home buyers to have a good credit score
FICO focuses on five categories when calculating your score: How much debt you have, your payment history, your debt utilization ratio (how much you owe in relation to your credit limits), how far back your credit history goes and your mix of various types of credit.
Here are five sure steps to "credit score suicide"
1. Making late payments
Payment history accounts for up to 35% of your credit score and a single late payment, if you have a good credit rating, can lower your score up to 110 points immediately following the late payment.
The longer it's been since you were late on a payment, the less of an impact it will have on your score, but "your history does follow you.
2. Carrying a big balance
Your credit utilization accounts for 30% of your credit score. Credit utilization is the percentage of credit used to available credit.
While consolidating all your credit cards into one low interest rate card makes sense from a monthly payment perspective it can have a devastating effect on your credit score.
Your magic number here is 50% or less. If you can maintain your credit usage (across all your cards) to 50% of the available credit you won't see your FICO score in need of life support.
3. Closing a credit line
At first that may seem counter-intuitive, but if you close a credit card it could negatively impact your credit utilization ratio AND if it is an older account, it could also affect the age of your credit history.
If the account has a zero balance and no annual fee, leave it alone until after you've moved into your new home.
4. Opening a credit line
In order to open a new account, a credit card company will need to check your credit, and a typical "hard" inquiry like this will lower your score by about five points, plus the cost of opening a new line of credit typically ranges from five to 15 points.
Twenty points may not seem like a lot, but in today's first time home buyer loan market, it can make the difference between home owner and renter.
5. Defaulting
Defaulting on a credit obligation, whether it be a credit card charge off, a collection account or bankruptcy is the single worst thing for your credit score.
Declaring bankruptcy could lower a good score of 750 by up to about 250 points.
Even bankruptcy isn't "life without parole". If there were extenuating circumstances you may be just a couple of years from buying your first home.
Buying a home after bankruptcy-Part I
Buying a home after bankruptcy-Part II
But, you have start rebuilding and any slip ups afterward will only further delay making that move from home buyer to home owner.
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