Importance of The Raising YourCredit Score
BY LISA SCONTRAS
With budding signs of a housing recovery on the horizon, you may be thinking now is the right time to start shopping for a home. But before you jump into the car with the open house guide in hand, your first priority should be making sure your credit score is in top-notch home-buying shape.
Runaway credit and debt were essentially the catalysts of the housing crisis, and have led to today’s tighter standards from lenders and the necessity for borrowers to better understand how to manage their debt more carefully.
Martha Camacho, vice president at First Hawaiian Bank, warns if your credit score falls below a certain point, you might be unable to qualify for a mortgage loan.
“The credit score is one of the 5 C’s of credit we use in qualifying a borrower for a loan,” says Camacho. “It is extremely important, as it not only dictates the borrower’s interest rate and points on the mortgage loan request, but whether you will be approved for a loan at all, since Fannie Mae and Freddie Mac have minimum credit score requirements.”
Your credit score is objective and is derived from information in your credit report.
Each credit bureau agency has its own way of determining the exact score, but in general it’s based on your credit history and status with creditors. In essence, your score is a prediction of your likelihood to repay debt responsibly. When buying a home, a lender will not only want to see that you have the income to support the mortgage payments, but also that you have a reliable track record of paying bills on time.
“A person’s credit score is determined primarily by the number of outstanding loans and/or credit and charge cards, the outstanding balances and how these credit facilities have been handled. Are they paid on time? How many times late? Any bankruptcy filings? Judgments?” says Camacho. “How much outstanding debt they have and the kinds of debt a person has play a part in each person’s score.”
Because your credit report is basically a summary of your financial behavior, any type of legal action, such as bankruptcies or monetary judgments against you, will likely appear on your credit report. Your score will not only reflect how you’ve used credit, but also how well you have managed paying it back. The highest ratings are given to those who do all of that well.
“I would say delinquencies, bankruptcies and judgments have the biggest negative effect,” Camacho says. “And the biggest positive would be no delinquencies at all.”
Those who are determined to clean up their own personal balance sheets can obtain a free copy of their credit score once every 12 months by going to www.FHB.com and selecting the link to www.annualcreditreport.com.
Camacho says that if your credit score falls below 680, then it is a good idea to start working to improve your score especially if you want to buy a home in 2012 and get the best interest rates and points on a loan. Lenders weigh your credit score as part of your entire application to determine whether or not you’re a good credit risk. With interest rates low, those who have good credit will be better positioned to take advantage of the opportunities currently available in this unique
lending market. And a good credit score will open the door for you.
Understanding your credit and how your credit history may impact the interest rate charged and the type of loan for which you may qualify can be clarifying, especially if you have had past credit difficulties.
“An improved score will enable a person to obtain favorable rates and points when obtaining a mortgage loan,” she says. “The difference in points can be as much as 3 percent for credit scores ranging from 620 to 740.”
First Hawaiian Bank has the financial ability to extend a portfolio loan to a buyer who may not meet all the standard qualifications set forth by Fannie Mae and Freddie Mac, but is extremely strong otherwise in the other 4 C’s. If you find your circumstances might be unique, check with First Hawaiian Bank about portfolio loans.
The Five C’s
CHARACTER Refers to anything that shows the borrower will likely repay the loan and includes employment history, credit score, ability to pay other debts, integrity and honesty.
CAPACITY Requires that the borrower have sufficient income to comfortably make the payments.
CAPITAL Evaluates the borrower’s net worth and cash reserves, including cash for a down payment.
CONDITION Has to do with the current condition of the economy, the industry in which the borrower works, the likelihood of continued employment and the interest rate environment.
COLLATERAL Relates to the current value of the home that is being purchased, adequate loan-to-value and down payment.