Understanding Credit Scores – How it affects your real estate purchase power
Remember your credit score indicates your likeliness or willingness to pay and ultimately drives the cost of financing.
Here is how your credit score is calculated:
- Payment History = 35%
- Do you pay on time – the single most important factor
- Amount Owed = 30%
- Revolving accounts – Keep your credit accounts open and keep the balance below 30% of the credit limit.
These two factors account for 65% of your credit score.
- Length of Credit History = 15%
- Longer credit history is better
- How long have your accounts been open – Keep long established credit lines open. If you must close an account, close the youngest accounts first.
- How long since you last used them – Use your credit accounts once a quarter while keeping your balance less than 30% of the limit.
- New Credit = 10%
- Short Term Credit Accounts – Opening several credit accounts for short periods of time increases credit risk.
- Type of Credit in Use (Healthy Mix) = 10%
- 2 Installment loans
- 3 Revolving accounts with balances below 30% of the limit
- No Collections
- No Foreclosure
- No Late Payments
There are numerous credit scoring models and for the purposes of this article we will focus on the FICO score. Your FICO score is the score that banks look at when determining your credit worthiness for mortgage borrowing the rate to borrow.
How your FICO affects your purchasing power:
- You want to purchase a $350,000 home. You can afford $1,670 a month.
- You need a FICO score of 760 or better.
- A FICO score 100 points lower, erodes your purchase power by $40,000. You would only qualify for a purchase of $310,000.
- You want to purchase a $750,000 home. You can afford $3,530 a month.
- You would need a FICO score of 760 or better.
- A FICO score 100 points lower erodes your purchase power by $85,000. You would only qualify for a purchase of $665,000.
Bottom line – take care of your credit score. Top 4 things to remember:
- Don’t open short-term credit accounts.
- Don’t close old accounts.
- Keep revolving debt under 30% of the limit.
- Pay bills on time.
If you would like more information on how to increase your FICO, please don’t hesitate to give us a call (720)935-4399 or email – [email protected].