As most people know, your credit score has a big impact on your mortgage rate and whether you can get a mortgage at all. However, there are a lot of misconceptions around credit scores. And if you do not have the right information, it is hard to make the best decision for your situation.
So, here are 4 common credit misconceptions that, when understood, can help you make better decisions related to your credit:
1) If I don’t have great credit, I will not qualify for a mortgage
You don’t have to have perfect credit to get a mortgage, particularly with loans that are government insured like FHA and VA. Lenders are usually willing to overlook minor derogatory items like late payments or collections on medical or consumer debts, particularly if they are more than 6 months old, and when other types of payment (particularly housing) have an on-time payment history.
2) Credit inquiries have a negative impact on my credit score
Credit inquiries, on their own, do not have a significant impact on your credit score. For example, mortgage and auto credit inquiries are often grouped by the credit reporting agencies as one inquiry when done within a prescribed timeframe. So, they only have a minor impact on your credit score. What does negatively impact your score are inquiries when there are symptoms of financial distress such as recent late payments, high balances in proportion to limits, collections or many new consumer debt accounts.
3) My current payments are on time, so my credit must be good
The #1 factor in credit is on-time payment history. The problem is that many people focus on the “on-time payment” and neglect the “history”. If you have late payments in your history, they do impact your credit. However, one or two late payments or collections that are more than one year old may not be overly negative, if you have an otherwise good payment history.
Closing credit cards, either after they are paid off or because of doing the “balance transfer” dance, hurts your credit because it eliminates your history.
4) High Student Loan Debt negatively impacts my credit
High student loan payments can inhibit your ability to qualify for a mortgage payment depending on your income. But, student loan debt generally has a positive to neutral effect on your credit as a type of debt (Mortgage debt = good, credit card debt = bad). You just need to ensure you have on-time payments and pay close attention if you are on any deferment or income-based repayment plan.
When you better understand how credit scores work, you can make better decisions around how you deal with your credit and when you want to consider applying for a mortgage. And if you are thinking of buying a home, I’d recommend starting up to 18 months in advance by speaking with a mortgage consultant to better understand what you can do to improve your credit score and position yourself for getting the best mortgage program possible.
Please contact us to schedule a time to talk about your specific situation. Just reply to this email or give us a call at (619) 692-3630.