Credit: What do a 32 GB IPhone and a 3200 sq. ft home have in common?
on Tuesday, February 26th, 2013 at 4:05pm.
The dimensions of your new IPhone and your home may vary, but when you're in the market to buy a new home, your lender may be talking about both in the same sentence. Don't let this confuse you, both the IPhone (as well as other credit card purchases) and the new home have an impact on your credit history and the willingness of different lenders to grant you a mortgage. Once it has been reviewed and you've been approved for a home loan, your credit score and credit history will play a crucial role in determining your interest rate. After the loan is closed and you begin the mortgage paying cycle, your lender will send that information to the credit bureaus and you'll see your new home loan on your credit report. This then influences your credit rating for all future purchases.
How Does it all Work?
You're likely familiar with the FICO score, which is calculated by the Fair Isaac Corp, the standard score used in the lending business. Your FICO score is determined using a variety of credit data in your report, and this data is grouped into five different categories. According to myfico.com, your FICO score takes into account both positive and negative information contained in your report. Late payments will lower your score just as establishing a good track record of making on time payments will raise your score.
Here's a Breakdown:
accounts for payment history. Don't worry, this isn't a deal-breaker. You can still carry debt and not be considered a high-risk borrower.
15% accounts for how long you've had credit history. Specifically, they look at your oldest account, your newest account, and an average of all your accounts. Generally, a longer history will increase your FICO score, though even for those who haven't been using credit long, they can still have a high FICO score. It all depends on the rest of your report.
accounts for new credit, while the other 10% accounts for the types of credit used. According to myfico.com, research has shown that opening several credit accounts in a short period of time represents a greater risk-especially if you haven't had credit for very long. As for the types of credit used, the score considers your mix of credit cards, retail accounts, installment loans, finance co. accounts and mortgage loans.
Your FICO score is calculated based on the above five categories, but the importance of each category varies per individual, and greatly depends on the overall information contained in your credit report.
If you are in the market to buy a new home, your FICO score is crucial, but your lender will also look at other things, such as how long you've been at your job and your income level.
What's Going to Happen to my FICO Score Once I Buy a Home?
You've heard that credit inquiries hurt your score. It's true that when your mortgage lender pulls your report, a “credit inquiry” is left behind, which results in a ding of about 5 to 7 points. The good news is that all inquiries made within a 30 day time period only count as one inquiry.
What's More both lenders and creditors look favorably upon homeowners, but your monthly payments do count as a liability until they are paid off in full. If you do buy a home and some time later you try to qualify for an auto loan, your lender will look at your debt to income ratio as they try to determine whether or not you can afford these new payments. Even if you have a stellar credit score, an expensive mortgage payment can impede your ability to qualify for other types of loans.
Everything counts. When making your mortgage payment, you have the opportunity to raise your score, or lower it. Mortgage loans are due on the first day of each month, and ask for the month prior. You'll receive your bill two to three weeks in advance of the due date. If you pay your bill on the second day of the month, technically you're late. However, most lenders offer a fifteen day grace period to receive their payment. So, if they receive it on the 16th day, they'll consider it late, and this has the potential of killing your score. Even a one time late payment can result in a steep decline of 70 to 90 points. However, for credit bureau reporting purposes, most mortgage lenders won't report a late payment until it exceeds 30 days or until the next payment is due. If you pay it on the 22nd day of the month, you'll no doubt get slapped with a late fee, but won't be reported as “late.”
Obtaining a conventional mortgage loan in 2013 is not what it used to be. For this year, federal officials unveiled a new set of mortgage rules which any company that gives out mortgages must abide by. The new rules are designed to avoid a recurrence of what happened during the housing bubble, and is meant to keep lenders from giving out loans to those who can't afford to pay them off.
2013 Standards to Obtain a Conventional Mortgage
According to CNN Money, the following are required to approve a home loan:
Income and assets must be sufficient to repay the loan;
Full documentation of job history;
Must meet minimum credit standards;
Monthly payments must be affordable;
Borrowers must be able to afford home-related expenses such a property taxes;
Borrowers must be able to afford other debts associated with the property such as home equity loans;
Lenders must look at a borrower's other debt obligations such as student loans, car loans and credit card debt.
So next time you're looking at a new 32 GB IPhone, or any other large credit card purchase, consider the impact it may have on your credit report if you're unable to make payments on time.