Tuesday, October 11, 2011

5 Credit Myths

Lenders are constantly changing their requirements and over the past several years many would be buyers have been disqualified because of their credit score. There has never been a more crucial time to take some time out to educate ourselves on credit scores and how they affect our everyday lives. If you're looking to buy, refinance or even rent a home, variances in credit score can stop you from qualifying for the home of your dreams, and can either cost or save you thousands of dollars in interest over the life of your loan.

Let's get right to it with five common credit myths:

Myth #1 Having lots of cash, a great income or tons of equity makes your FICO score less relevant.

Fact: No matter how much cash you have, if you want to qualify for a mortgage, you must meet the lender's FICO score guidelines. Lenders don't look at your credit score on the theory that your other assets diminish your credit riskiness. Lenders want to avoid having to foreclose on a home, it's a costly and lengthy process.

How you've handled your credit in the past is the best predictor of whether you'll default on a loan in the future. Your credit score will determine whether or not you will qualify for a loan and what interest rate you will be charged to borrow, no matter how much money you make.

Myth #2 Having NO debt or NO late payments means you have great credit.

Fact: Being financially responsible and having good credit are two different things. Your FICO score is designed to be a measure of your responsibility when it comes to managing debt. Using credit regularly and responsibly is wise.

Having no credit accounts or debts doesn't give you good credit- it gives you no credit. The term used by the lending industry for consumers with no credit is "Ghost" how is a lender going to prove to an underwriter and investor wanting to purchase the loan if there is no recorded documentation? On the flip side, being maxed out on various credit accounts all the time, submitting lots of credit applications can actually depress your score. The best practice is to have several accounts that you actively and responsibly use on a monthly basis.

Tip: FICO gives a top score to accounts with balances that are 30 percent of the credit limit

Myth #3 Checking your own credit score in advance prevents surprises when you apply for a mortgage.

Fact: Your mortgage originator must pull their own version of your credit report. It may have a very different score, rating scale or even different line items. That is why it is imperative to start working with a mortgage professional as early as possible. This way you can detect any errors or issues and work to get them resolved as soon as possible.

Myth #4 If you've had a foreclosure or short sale, your credit report will be damaged for 7 years.

Fact: Derogatory credit items, ie. late mortgage payments, foreclosures and short sales, appear on your credit report for 7 years. However, your credit score can be rehabilitated enough to buy a home or obtain other credit in less time. The type of loan you will be seeking to purchase your next home with, how much cash you can put down and whether or not there were extenuating circumstances involved in losing your home in the first place; some loans will allow for immediate purchase, others require a waiting period of 2,4,5 or even 7 years of a home.

Your FICO score is also a huge component in a post home loss purchase. The length of time it takes your FICO score to recover actually depends on how high it was beforehand. The higher the score was, the longer it takes for full recovery.

As the foreclosure or short sale ages, its impact on your score will decrease too.

Myth #5 Short sales have much less impact on your credit score than foreclosures.

Fact: Short sales and foreclosures actually have the SAME impact on your credit score, according to the FICO folks themselves. (Exceptions are for short sales or deeds-in-lieu of foreclosure where the property was not upside down)

Also, the number of missed payments you had before your home was lost to foreclosure or short sale might weigh on how gravely injured your FICO score is in the process. On average there are 2 years of missed payments before a home is repossessed by the bank.

If you're looking to buy, sell, refinance or just have some real estate questions. Please feel free to give me a call, I'd be happy to assist you!

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