Jeff Hansen & Arvin Paredes

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Downtown San Jose Condo & Townhouse Living

How Much Of A Role Does Credit Play In Purchasing A Home?

Lender Dave Setti of Turnkey Mortgage does a fantastic job of breaking down the different aspects of credit and how each of those aspects play a role in purchasing a home. Read below in his article of the “Five Factors of Credit Scoring.”

Five Factors of Credit Scoring

Not to put too fine a point on it, CREDIT IS KING! When it comes to buying a home, yes a lender want you to put some money down and have a solid income. But credit comes before down payment and income every time. Why you say? Simple: if you have a low income, you can always get a co-signer. If you have no down payment, you can always get a gift. However, if you have poor credit, you have to work for months, sometimes years, to erase the damage you have done. Remember, the best indicator of whether you will pay your bills in the future is whether or not you have paid your bills in the past! So what are the factors that make up your credit score?

Credit scores are comprised of five factors. Points are awarded for each component, and a high score is most favorable. The factors are listed below in order of importance.

1. PAYMENT HISTORY – 35% IMPACT
Paying debt on time and in full has the greatest positive impact on your credit score. Late payments, judgments and charge-offs all have a negative impact. Delinquencies that have occurred in the last two years carry more weight than older items.

2. OUTSTANDING CREDIT CARD BALANCES – 30% IMPACT
This factor marks the ratio between the outstanding balance and available credit. Ideally, the consumer should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit at least 2-3 months prior to trying to purchase a home.

3. CREDIT HISTORY – 15% IMPACT
This portion of the credit score indicates the length of time since a particular credit line was established. A seasoned borrower will always be stronger in this area.

4. TYPE OF CREDIT – 10% IMPACT
A mix of auto loans, credit cards and mortgages is more positive than a concentration of debt from credit cards only. You should always have 1-2 open major credit card accounts.

5. INQUIRIES – 10% IMPACT
This percentage of the credit score quantifies the number of inquiries made on a consumer’s credit within a twelve-month period. Each hard inquiry can cost from two to 25 points on a credit score, depending on the amount of points someone has left in this factor. Note that if you pull your credit report yourself, it will have no effect on your score.

Was this article helpful? If you have any other questions about this topic, please don’t hesitate to contact me.

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