Good credit 101: Five things homebuyers should know about lending

June 18

Before buying a condo in D.C., David Black, 31, was told by his lender that his high credit score could rise even more with a second well-managed credit card. He got one, which helped him land a good interest rate. (Jason Hornick/For Express)

David Black’s parents taught him the importance of good credit. So, as an adult, he was careful about his spending and avoided taking on too much debt. When he was ready to buy a condo in D.C., he knew that his credit score would be good, so he was surprised when his lender told him that his score could be even higher if he used more than just one credit card.

“I was getting points for making on-time payments on that card,” says Black, 31, who works as a transportation lobbyist. “But having another credit card in use would demonstrate my ability to manage credit.”

So he started making purchases with a second card — and paying it off regularly — to show that he could handle another layer of debt. His careful spending and strong credit history helped him get a good interest rate on his mortgage for the one-bedroom condo at CityCenterDC he purchased recently.

You probably know that your credit history matters, especially when buying a home. But do you know why it matters so much? Or how you can drive up the three-digit credit score you’ve been assigned? Once you do, you might think twice about splurging on a vacation or big-screen TV if you’re hoping to become a property owner in the not-too-distant future.

Size Up Your Spending

With a home mortgage, buyers typically borrow a hefty chunk of change, and lenders want to ensure that sizable loan gets paid back. To get a sense of the risk they’ll be taking, lenders examine each home buyer’s credit history, which tracks how they’ve handled other debts like credit cards and student loans. The better the track record, the higher the credit score and the less risky a borrower appears.

Your credit score impacts your ability to get a loan in the first place. It also affects the kind of loan you get, how low an interest rate you can lock down, and how big your down payment needs to be. A higher score gives borrowers more choices and more favorable interest rates.

Those better loan terms save you money every month. For example, if you borrow $300,000 at a fixed 3.813 percent annual interest rate, and agree to pay it back over 30 years, you’d be paying the lender $1,400 every month. Raise that interest rate slightly to

4.035 percent, and the monthly payments increase to $1,438, according to myFICO, the consumer division of Fair Isaac, the company that invented the FICO credit risk score many lenders use.

“Some people may think, ‘What’s that? That isn’t even going to buy me a decent dinner,’ ” says Gerri Detweiler, director of consumer education at Credit.com. “But over the life of a loan, it’s a huge difference.”

For the example above, that would be a difference of $13,680 over the full 30 years of the loan. And as the interest rate climbs, that number goes up.

Another benefit of a good credit rating: The stronger your financing package, the more appealing you are to sellers. They want buyers who won’t have trouble sealing the deal.

“In a market that moves as quickly as ours, this helps to strengthen your case that you’re a well-qualified candidate,” says Thomas P. Daley, an associate broker at TTR Sotheby’s International Realty (202-333-1212).

Understand Your Score

Your credit score takes into account things like your ability to pay your bills on time and whether you pay off your credit cards each month, just make the minimum payment, or fall somewhere in between.

It also looks at the ratio of debt you’re carrying versus your available credit. If you’ve got $30,000 in available credit but $20,000 of that is tied up in credit-card debt, your score will be negatively affected by the high debt-to-credit ratio.

Start Preparing Early

Don’t wait until you start checking out open houses to get informed.

“If your lease expires in six months and you’re thinking about purchasing, that’s the time to start talking to a lender,” says Greg Ford, an agent at Keller Williams Capital Properties (301-706-3388) and president of the Greater Capital Area Association of Realtors.

Before you sit down with a lender, get a sense of your score by using a website like FreeCreditReport.com or Credit.com, sites that also offer insight into the reasons for your ranking and ways to improve.

Make Adjustments

Most lenders want to see a credit score of 720 or higher. If you’re not there yet, you can take steps to improve your rating.

One of the easiest? Pay down some of your credit cards and other debt. “Reducing your debt level is very doable and can have quick results,” says Detweiler.

Comb your credit report for mistakes, which can happen, or things like unpaid medical bills, which show up on your credit history. Take care of any missing payments and contact creditors to get errors removed from your report.

Don’t be afraid of using plastic. “You want to have a credit history,” says Corey Carlisle, senior vice president at the American Bankers Association. But don’t go overboard with too many credit cards.

Hold Tight Until Closing

Once you’ve been approved for a loan, don’t do anything that would change your financial profile.

Don’t close existing accounts — that can affect your debt-to-credit ratio — and resist the urge to sign up for, say, a Target credit card, no matter the savings being pushed on you at the cash register.

“I was told that I needed to keep everything as it was when I started the process,” says Bevin Padden, 29, a federal consultant and first-time homebuyer who bought a co-op near Adams Morgan. “I became very aware of everything that I was spending.”

Your loan isn’t finalized until you officially close on a property (a process that typically lasts 30 to 60 days), which means a lender could change its mind at the last minute if you make any risky moves.

“You would be surprised how many people go out and either quit their job or open a retail account to buy furniture before their loan is done,” says Detweiler.

The key is appearing responsible, not rash. “Living within your means is always going to be the best answer,” says Carlisle.

 

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