Video: What Your Credit Score Means When Buying a Home

TRANSCRIPT

Hello, I’m Amanda Seeholzer, I am a certified financial counselor, and today we’re going to talk about the importance of getting all your ducks in a row to qualify for loans, and specifically mortgages.

So when you apply for a loan, some of the things that they look at are your credit score, your credit history, your job time, what type of work you do, and what type of income you have. They also look at how many trade lines you have on your credit report. For example, if you were applying for a mortgage loan, they like to see at least three trade lines on your credit report so that it builds enough history for them to evaluate you.

A trade line on your credit report is just something that you have open in your name, like a credit card, for example, and you’re showing payment history on that. So if you had three different types of those, or two credit cards and a personal loan, that shows not only multiple trade lines on your credit report showing whether you make payments on time, but it also shows different types of loans that you’re paying and managing well all at the same time.

So when you apply for any loan, they are going to evaluate your affordability. And essentially, another term that they use for that interchangeably is your debt to income ratio. What that means is whatever your income is, they use gross income. So whatever your gross income is, and then whatever all of your outgoing debts are monthly, they find a percentage of how much debt is coming out of your income monthly. And that dictates your affordability.

When you go to buy a house, for example, your monthly housing from your income should be no more than thirty-five percent of your income. Now that’s sometimes hard to do. And if you have low debt, you can go a little bit above that. But the higher you go above thirty-five percent, you may not be able to afford another loan the next time something comes up, like you need a car loan, and maybe you don’t have one right now.

In our high-interest rate environment that we’re currently facing, you can do something if you have a little bit more cash up front, which is called buying points. If you buy points towards your mortgage, it decreases your interest rate. So that little bit of cash up front that you can scrape up could save you a lot more in the long run over that life of that thirty-year mortgage.

If you’re looking to buy a home, consider all different mortgage products because there are adjustable rate mortgages which sometimes can be less cash up front, so they are a little bit more affordable to get into.

And I’m sure you’ve heard this many times before, but I can’t stress enough the importance of saving money ahead of time. We can never save too much before you’re looking at buying a house. When we purchase a house, it’s new to us, so we don’t know what kind of issues could come up, so we want to be prepared.

Well, when you’re looking to buy a home, you want to make sure all your ducks are in a row, so you’re looking at your affordability, you’re looking at your credit scores, you’re looking at the price range you’re comfortable with, because when you buy a home, you might be able to qualify for more than what fits in your cash flow budget side of things. So definitely holistically looking at your financial picture.

While you’re getting all your ducks in a row to get ready to buy a home, definitely feel free to reach out to us for assistance, or any of our mortgage loan officers, and there’s lots of information on our website that can help you through your journey.