31 May 2015

How Much Can I Afford?

How Much Can I Afford?
How much mortgage money can I qualify to borrow?

This is typically the number one question mortgage professionals are asked by new clients.

Of critical importance when considering mortgage financing: There is sometimes a difference between what a client ***can*** borrow and what they ***should*** borrow.

In other words, what makes for a comfortable long-term mortgage payment?

The Quick Answer:

If we’re simply considering the financial math, lenders will calculate your Debt-to-Income Ratio and generally allow for 28-31% of your gross income to be used for the new house payment with up to 43% of your gross income to be used for all consumer related debts combined.

Sample Mortgage Scenario:

Let’s use a gross monthly income of $3000 and a qualifying factor of 30% Debt-to-Income Ratio:

$3000 multiplied by .3 (30%) = $900 max monthly mortgage payment

This means that your mortgage payment (Principal, Interest, Taxes, Hazard Insurance) cannot exceed $900 a month.

“Ballparking” a Qualifying Loan Amount:

Simple step:  We use a safe average of $7 per month in payment for every $1000 in purchase price so…

Step 1)  $900 a month divided by $7 = $128.50

Step 2) $128.50 multiplied by 1000 = $128,500 loan amount.

Remember, these are average ratios and guidelines set by most lenders for common mortgage programs.

Keep in mind, while most consumer debts are listed on a credit report, there are some additional monthly liabilities that may contribute to the overall qualifying percentages as well.

Regardless of how your personal income and credit scenarios factor in, it is important to consider your overall budget when trying to determine how much of a mortgage you should qualify for.

Other items to consider in your monthly budget:

  1. Confirm all debts are taken into account
  2. Any private notes or family loans
  3. Short-term expenses – medical, auto repairs, travel, emergencies
  4. Plan on additional expenses for the home such as water, electric, maintenance, etc…
  5. Keep a cushion for savings and financial planning

Related Articles – Mortgage Approval Process:

30 May 2015

Four Possible Reasons To Refinance

Four Possible Reasons To Refinance

A mortgage is generally the largest debt most homeowners have to manage.  It’s a good idea to give your personal real estate finance portfolio a check-up at least once a year.

Since there are many reasons a homeowner may choose to refinance, we’ll take a look at the four most common.

1.  Mortgage Rates Drop:

Typically, the most common reason that homeowners refinance their mortgage is to secure a lower interest rate. Interest rate and loan amount determines the total cost that a borrower will pay. The lower the interest rate, the less the overall cost will be. Interest is calculated on a daily basis and usually paid back to the lender on a monthly basis.

2.  Lower Payments:

Lowering a mortgage payment can be achieved by lowering the mortgage rate, lengthening the loan term, combining two or more loans or removing mortgage insurance.

3.  New Mortgage Program:

Refinancing an Adjustable Rate Mortgage (ARM) to a new Fixed Rate Mortgage (FRM), combining a first and second mortgage or paying off a balloon loan are three possible reasons to explore a refinance.

4.  Debt Consolidation:

If there is sufficient equity, sometimes paying off consumer debt by combining all debts into one lower monthly mortgage payment can significantly reduce the short-term deficits in a budget.  However, it’s important to keep in mind the total cost of that debt by adding it into a 30 year mortgage payment.


Frequently Asked Refinance Questions:

Q:  Do I have to refinance with my current mortgage company?

No, you may choose any company to refinance your mortgage since the new loan will replace the existing mortgage.

Q:  Is it easier to refinance with my current mortgage company?

It is possible your current mortgage company may require less documentation, but this could add additional cost or a higher interest rate. Do your homework and shop around to make sure you’re getting the best deal.

Q:  Will I automatically qualify if I’ve never made any late payments?

No, you will have to qualify for your new refinance. However, certain programs will allow for reduced documentation like a FHA to FHA Streamline Refinance.


Related Article – Refinance Process:

29 May 2015

Florida Jumbo Loan and Loan Limits

Florida Jumbo Loan and Loan Limits

Florida Real Estate and Jumbo Mortgage Rates are at an All Time Low!

Are You Going to Look Back on 2011 and Wish You Bought a Home?

Please do not think we are exaggerating about our current market conditions.

Florida Real Estate, especially in Fort Myers and Cape Coral, is selling quickly!

Imagine buying your dream home with a jumbo loan like this:

  • Low Fixed Rates!
  • Adjustable Rates Available!
  • 2nd Home and Investment Property. OK!

Check Florida Jumbo Limits by Clicking Here!

How Low Can it Go?

That seems to be the question on everyone’s mind when buying a home and here is our answer.

No one knows!!

But……..

We Have a Better Question For You!

If you think Florida Real Estate has not hit bottom, then how much lower can it go? 5%? 10%?

With home prices so discounted is holding out for another 5% to 10% really worth it?

Using a 30 year fixed rate of 5% on a loan amount of $100,000, a 5% decrease in value would equal an extra $25 a month!

Is it worth $25 a month to miss out on your dream house?

Apply Today by CLICKING HERE!

28 May 2015

Mortgage Basics

Mortgage Basics

Mortgage Basics

Simply put, a mortgage is a loan secured by real property and paid in installments over a set period of time.

The mortgage secures your promise that the money borrowed for your home will be repaid.

According to Wikipedia:

A mortgage loan is a loan secured by real property through the use of a document which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.

Components of a Mortgage:

1. Mortgage Approval:

Qualifying for a mortgage requires meeting a pre-determined set of guidelines established by a lender, which may include credit history, income, employment and assets.

In addition to personal qualifying factors, a property must also meet certain standards set by lenders before a borrower can obtain a mortgage loan secured by real estate.

2. Mortgage Payments

On a traditional 30 or 15 years fixed rate mortgage program that involves principal and interest, each payment made is divided into two parts (we’re not including taxes or homeowners insurance as part of this discussion):

The first part of the mortgage payment, which is commonly referred to as principal, goes to paying down the initial amount borrowed.

The second part is the interest paid for the money borrowed to purchase the property.

The amount paid in interest decreases each month, as the amount paid towards the principal balance increases. This apportioning is referred to as amortization.

Other types of mortgage payments available can include options for paying interest only or a teaser rate.

Either way, it is extremely important to have a solid understanding of the full payment and terms before moving forward with a particular option.

3. Mortgage Programs

Mortgage Programs come in many different types of flavors and colors depending on the down payment and/or monthly budget a borrower has been approved for.

There are also federally insured mortgages, such as FHA or VA loans, which have more flexible qualifying guidelines.

4. Closing Costs / Fees

The actual cost of obtaining a mortgage mainly depends on whether or not the borrower is paying points for a lower mortgage rate.  In some cases, there are also other loan processing and underwriting fees associated with the work involved in the transaction.

Fortunately, there are several consumer protection policies implemented by the government to help borrowers understand their options during the initial mortgage pre-qualification process. However, please keep in mind that there may be other closing costs not associated with a mortgage or real estate transaction to be aware of. Appraisal, pre-paid property taxes, insurance and interest, HOA dues and inspections are a few additional out-of-pocket expenses you should budget for.

5.  Mortgage Rates

While mortgage interest rates may change several times a day, there are a few market factors you can pay attention to which may impact your final payment.

Whether you’re shopping for the best rate, or trying to determine the difference between the Note Rate and APR, it definitely helps to understand what questions to ask a mortgage lender about your specific loan scenario.

26 May 2015

Mortgage Payments

Mortgage Payments

You’re probably curious why we’ve created an entire section about mortgage payments.

However, since a mortgage payment is one of the major side affects of purchasing real estate with a home loan financing program, we thought it would be important to highlight a couple topics and related articles about mortgage payments that may impact your monthly budget.

Mortgage Payment Basics:

Just in case your first mortgage payment comes due before you get your first payment coupon in the mail, there should actually be a temporary payment coupon included with your closing documents.

Your mortgage payment is generally due at the beginning of the month, and most lenders start assessing late fees on the 15th. It is extremely important to remain under 30 days late on a mortgage payment, especially within the first 8-12 months of closing on a new loan.

When you receive your first mortgage bill, there will be a few numbers that add up to your total payment:

Principal –

This is the portion that goes towards paying down your balance. An Amortization Schedule will break down the exact amount of each payment that is being applied to the principal and interest.

Interest

The interest payment is essentially the amount you’re paying the bank over time to borrow the principal balance.

Depending on which loan program, interest rate and closing cost scenario you chose, the amount of interest due every month may vary.

Taxes -

Real Estate Taxes can either be included (Impounded) in your monthly payment (PITI), or paid by the homeowner separately.

Certain government loan programs or high Loan-to-Value (LTV) mortgages require that taxes and insurance be included with the total mortgage payment.

Either way, it’s important to make sure you ask your loan officer and/or closing agent during the final loan docs signing to clearly explain what’s included in your monthly mortgage payment.

Insurance

This is your hazard insurance (Fire), which protects your home and belongings.  While there are many ways to save money on your property insurance, it’s important to know and trust your insurance agent so that you can be fully aware of what’s covered in your policy. Some homeowners shopping strictly on price may unknowingly leave valuable personal items without protection just to save an extra $15-$19 a month.

Mortgage Insurance –

This can come in a few different forms, depending on whether you have an FHA loan, VA, Conventional, Jumbo

Mortgage insurance is in addition to hazard insurance, and completely unrelated.  A lender will require a borrower to pay mortgage insurance on a property with a Loan-to-Value greater than 80%.  The main purpose of mortgage insurance is to protect from foreclosure losses if the borrower fails to meet the monthly payment obligations.

FHA has mandatory Mortgage Insurance, but in a different form.

VA loans have a separate Funding Fee to help protect their interests.

……

Frequently Asked Questions:

Q:  What Is an Impound or Escrow Account?

You’ve heard of the acronym PITI (Principal, Interest, Taxes and Insurance).  The escrow account covers the T&I, and is included in the monthly payment.

Q:  Are Impound Accounts Required?

Government loans, FHA and VA require an escrow to be established when a new purchase or refinance transaction is finalized.

If the LTV is low enough on certain other loan programs, an escrow waiver is allowed.  However, there is typically a higher interest rate associated with a mortgage payment that doesn’t have an escrow account due to the lender taking on more risk.

Q:  If I refinance my existing loan, what happens to my impound account?

The remaining reserves are generally refunded back to the homeowner.

Q:  Can I set up an escrow account later?

Yes, you can request an escrow account at anytime.  Keep in mind that you’ll have to deposit at least 12 month’s of hazard insurance, as well as around 6 month’s of tax payments in the escrow account to get it established.

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Related Articles – Mortgage Payments:

25 May 2015

Mortgage Closing Costs

Mortgage Closing Costs

Mortgage Closing Costs

In addition to the basic mortgage underwriting, processing and origination fees that are charged by a lender, there are several other costs associated with purchasing a new property.

Since every player on your real estate home buying team has a stake in your transaction, it’s a good idea to know how to budget for their services.

Common Out of Pocket Expenses to Budget For:

The items below are common to a Real Estate transaction and you may be required to pay for them up-front:

*In most cases the estimated fees for each item have been purposely left out since each scenario is different.

Home Inspection-

This is usually money well spent since the inspector will evaluate many aspects of your new home to ensure all systems are functioning as they are intended to.

Condominium Questionnaire Fees-

This may be required by your lender, and can take up to 30 days to receive.  Fees can range anywhere from $0 to $300 depending on the complex.

Well and Septic Certifications-

If your new home has either of these systems you will want to be sure that they are functioning properly.

Survey-

This document outlines the borders of your property, and the price can vary depending on the size of the lot and if it was actually staked out.  A survey is not a requirement for all purchase transactions.

Appraisal –

Depending on your state, loan size, property type, loan program and lender, the appraisal may be required to be paid for up-front by the borrower.  And, in some cases, more than one appraisal may be required, especially if the borrower is switching lenders and using conventional financing.

A typical purchase transaction will involve some, but not necessarily all of these services.  It’s important to discuss any other potential out of pocket expenses with your agent and loan officer, since some of these items may not be included on the initial Good Faith Estimate.

The important thing to realize is that the vendors providing these services will expect to get paid whether or not your transaction closes, and they may ask that you pay when services are rendered.

A combination of just a few of these fees could easily add up to over $1,000 so it is important to have the funds set aside at the start of the process.

Frequently Asked Questions:

Q:  Where Does My Earnest Money Go?

An Earnest Money Deposit (EMD) is simply held by a third-party escrow company according to the terms of the executed purchase contract.

For example, there may be a contingency period for appraisal, loan approval, property inspection or approval of HOA documents.

In most cases, the Earnest Money held by the escrow company is credited towards the home buyer’s down payment and/or closing costs.

*It’s important to keep in mind that the EMD may actually be cashed at the time escrow is opened, so make sure your funds are from the proper sources.

Q:  Do I Have to Pay My Real Estate Agent on a Purchase Transaction?

In most cases, the buyer is not responsible for covering the cost of their real estate agent.

When a home owner hires a real estate agent to list, market and sell their property, they’re also (in most cases) agreeing to compensate the agent representing a buyer.

A common myth is that a buyer will get a better price on a property if the seller doesn’t have to pay the typical 3% to a buyer’s agent. However, it’s more expensive to buy an overpriced property, not negotiating properly for the acceptable seller paid closing costs, overlooking important language in the purchase contract, missing potential commercial zoning updates on a nearby lot, or buying a home that has a lawsuit against the HOA.

Q:  What Are Mortgage Points?

Mortgage points are fees charged by the lender for services and/or a lower interest rate.

One Mortgage point is equal to one percent of the loan amount. For example, on a $100,000 mortgage $1,000 would be equal to one point.

Understanding what points are and how they work can save you thousands of dollars on your mortgage. Borrowers can pay mortgage points to reduce the interest rate charged on their mortgage. The Borrower may also choose to raise the interest rate to reduce the closing costs. This is sometimes called buying up your interest rate. This buy-up strategy is used when the intentions of the borrower is to keep the mortgage for a short period of time.

To decide whether or not to buy-up or buy-down your interest rate you must first calculate a breakeven point. The following formula can be used:

Cost of buy down / monthly savings = months to breakeven point. If you plan to keep the mortgage longer than the breakeven point then buying down points may be beneficial to you.

For example: $1,000 cost to buy down rate / $100 savings per month = 10 months to breakeven

In the above example if you plan to keep the mortgage for more than ten months (the breakeven point) you should buy-down the interest rate. In the above example if you kept the home for five years your savings would be $5,000.

Make sure you consider mortgage points in your strategy when getting a loan. It can save you thousands of dollars.

Q:  Are Discount Points Tax Deductible?

Yes, they may be tax deductible, but make sure to speak with your tax advisor.

Q:  Can I Pay More Than One Point For a Lower Rate?

Mortgage points usually are calculated in 1/8 increments. A good rule of thumb to follow on a 30 year fixed rate is for every .25% drop in interest rate it will cost you one mortgage point.

Q:  Is a “No Origination Loan” or “No Cost Loan” a Form of Buying Up a Rate?

Yes, this strategy is usually used when the borrower is planning to keep the mortgage for a shorter period of time.

19 May 2015

Mortgage Rates

Mortgage Rates

How Do I Know If I’m Getting The Best Interest Rate?

Interest rates are impacted by a borrower’s credit score, loan term, mortgage program and a series of market factors that are outside of our control.

Unfortunately, many advertisers will tease a low interest rate in a marketing campaign for the purpose of creating interest in a specific loan program which may only fit a unique type of qualified borrower.

However, by promoting a lower note rate, with a higher APR, lenders are able to control the flow of the inbound phone call or Internet lead.

Understanding how interest rates work will certainly help relieve a lot of unnecessary anxiety about the home financing process.

While loan programs, credit scores and outside economic factors tend to control mortgage rates, borrowers do have the option of paying more up-front at the time of closing in the form of a discount point or loan origination fee in order to secure a lower interest rate.

Alternatively, borrowers currently have the option of taking a slightly higher rate in exchange for lower closing costs.  This particular rate / closing cost scenario is sometimes referred to as a “No Closing Cost Loan” option, or something similar.

Mortgage Rate Basics:

How Are Mortgage Rates Determined?

Many people believe that interest rates are set by lenders, but the reality is that mortgage rates are largely determined by what is known as the Secondary Market.

The secondary market is comprised of investors who buy the loans made by banks, brokers, lenders, etc. and then either hold them for their earnings, or bundle them and sell them to other investors.

When the secondary market sells the bundles of mortgages, there are end investors who are willing to pay a certain price for those loans.

…..read more about (Secondary Markets)

Top Five Market Factors That Influence Mortgage Rates

Timing the market for the best possible opportunity to lock a mortgage rate on a new loan is certainly a challenge, even for the professionals.

While there are several generic interest rate trend indicators online, the difference between what’s advertised and actually attainable can be influenced at any given moment by at least 50 different variables in the market, and with each individual loan approval scenario.

Outside of the borrower’s control, the mortgage rate marketplace is a dynamic, volatile, living and breathing animal.

Lenders set their rates every day based on the market activities of Mortgage Bonds, also know as Mortgage Backed Securities (MBS).

On volatile days, a lender might adjust their pricing anywhere from one to five times, depending on what’s taking place in the market.

Inflation, The Federal Reserve, Unemployment, Gross Domestic Product and Geopolitics are a few of the items you can pay attention to if you’re trying to track rates for a 30 day lock.

…..read more about (Rate / Market Indicators)

8 Questions Your Lender Should Be Able To Answer About Mortgage Rates

Simply checking online for today’s posted rate may not lead to your expected outcome due to the many factors that can cause each individual rate and closing cost scenario to fluctuate.

Since mortgage rates can change several times a day, it’s more important to pre-qualify your lender about his/her competency level with regards to mortgage rates. If your lender doesn’t know what to look for or how to answer some basic questions, there is a good chance you may not ever see that initial interest rate you were quoted.

…..read more about (Mortgage Rate Questions)

What’s The Difference Between Note Rate and APR?

Low rates with a high APR may or may not be the best deal.

Comparing apples to apples is the best way to determine which loan closing cost and rate scenario makes sense for your short and long-term financial goals.

…..read more about (Comparing Mortgage Rates)

How Do Mortgage Rates Move When The Fed Lowers Rates?

The traditional news media generally announces mortgage rate movement a few days too late, or when rates are moving in the opposite direction of where we need them to go.

One of the big misconceptions most people have about mortgage rates is that the Fed, and / or Federal Government control what mortgage rates look like every day.

…..read more about (The Fed and Rates)

…..

Related Mortgage Rate Video:

18 May 2015

Should I Refinance or Get a HELOC For Home Improvements?

Should I Refinance or Get a HELOC For Home Improvements?

For homeowners interested in making some property improvements without tapping into their savings or investment accounts, the two main options are to either take out a Home Equity Line of Credit (HELOC), or do a cash-out refinance.

According To Wikipedia:

A home equity line of credit is a loan in which the lender agrees to lend a maximum amount within an agreed period, where the collateral is the borrower’s equity. 

A HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit, similar to a credit card.

HELOC funds can be borrowed during the “draw period” (typically 5 to 25 years). Repayment is of the amount drawn plus interest.

A HELOC may have a minimum monthly payment requirement (often “interest only”); however, the debtor may make a repayment of any amount so long as it is greater than the minimum payment (but less than the total outstanding).

Another important difference from a conventional loan is that the interest rate on a HELOC is variable. The interest rate is generally based on an index, such as the prime rate. This means that the interest rate can change over time. Homeowners shopping for a HELOC must be aware that not all lenders calculate the margin the same way. The margin is the difference between the prime rate and the interest rate the borrower will actually pay.

A Home Equity Loan is similar to the Line of Credit, except there is a lump sum given to the borrower at the time of funding and the payment terms are generally fixed. Both a Line of Credit and Home Equity Loan hold a subordinate position to the first loan on title, and are typically referred to as a “Second Mortgage”. Since second mortgages are paid after the first lien holder in the event of default foreclosure or short sale, interest rates are higher in order to justify the risk and attract investors.

Measuring The Different Between HELOC vs Cash-Out Refinance:

There are three variables to consider when answering this question:

1.  Timeline
2.  Costs or Fees to obtain the loan
3.  Interest Rate

1. Timeline –

This is a key factor to look at first, and arguably the most important. Before you look at the interest rates, you need to consider your time line or the length of time you’ll be keeping your home.  This will determine how long of a period you’ll need in order to pay back the borrowed money.

Are you looking to finally make those dreaded deferred home improvements in order to sell at top dollar? Or, are you adding that bedroom and family room addition that will finally turn your cozy bungalow into your glorious palace?

This is a very important question to ask because the two types of loans will achieve the same result – CASH — but they each serve different and distinct purposes.

A home equity line of credit, commonly called a HELOC, is better suited for short term goals and typically involves adjustable rates that can change monthly. The HELOC will often come with a tempting feature of interest only on the monthly payment resulting in a temporary lower payment. But, perhaps the largest risk of a HELOC can be the varying interest rate from month to month. You may have a low payment today, but can you afford a higher one tomorrow?

Alternatively, a cash-out refinance of your mortgage may be better suited for securing long term financing, especially if the new payment is lower than the new first and second mortgage, should you choose a HELOC. Refinancing into one new low rate can lower your risk of payment fluctuation over time.

2. Costs / Fees –

What are the closing costs for each loan?  This also goes hand-in-hand with the above time line considerations. Both loans have charges associated with them, however, a HELOC will typically cost less than a full refinance.

It’s important to compare the short-term closing costs with the long-term total of monthly payments.  Keep in mind the risk factors associated with an adjustable rate line of credit.

3. Interest Rate –

The first thing most borrowers look at is the interest rate. Everyone wants to feel that they’ve locked in the lowest rate possible. The reality is, for home improvements, the interest rate may not be as important as the consideration of the risk level that you are accepting.

If your current loan is at 4.875%, and you only need the money for 4-6 months until you get your bonus, it’s not as important if the HELOC rate is 5%, 8%, or even 10%. This is because the majority of your mortgage debt is still fixed at 4.875%.

Conversely, if you need the money for long term and your current loan is at 4.875%, it may not make financial sense to pass up an offer on a blended rate of 5.75% with a new  30-year fixed mortgage.  There would be a considerable savings over several years if variable interest rates went up for a long period of time.

…..

Choosing between a full refinance and a HELOC basically depends on the level of risk you are willing to accept over the period of time that you need money.

A simple spreadsheet comparing all of the costs and payments associated with both options will help highlight the total net benefit.

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Related Article – Refinance Process:

17 May 2015

Understanding Credit

Understanding Credit

Credit is one of the most important components in the mortgage approval process.

Lenders look at a borrower’s credit score, number of open accounts, payment history, type of credit borrowed and a series of other factors when determining what level of risk to assess to each lending scenario.

Down payment requirements, loan programs, flexibility on income and even interest rates can be impacted by a slight bump in a credit score.

According To Wikipedia:

A credit score in the United States is a number representing the creditworthiness of a person or the likelihood that person will pay his or her debts.

A credit score is primarily based on a statistical analysis of a person’s credit report information, typically from the three major American credit bureaus: Equifax, Experian, and TransUnion.

The Fair Isaac Corporation, known as FICO, created the first credit scoring system in 1958, for American Investments, and the first credit scoring system for a bank credit card in 1970, for American Bank and Trust.

The three credit reporting agencies in the United States of America, Equifax, Experian, and TransUnion, collect data about consumers used to compile credit reports. The credit agencies use FICO software to generate FICO scores, which are sold to lenders. Each individual actually has three credit scores at any given time for any given scoring model because the three credit agencies have their own databases, gather reports from different creditors, and receive information from creditors at different times.

In the United States, a resident is permitted by law to view their credit report once a year at no charge by visiting the website AnnualCreditReport.com. The individual’s “credit score” information is available for an additional fee from each of the three credit reporting agencies. In addition, the Fair Isaac Corporation sells FICO scores directly to consumers using data from Equifax and TransUnion.

A FICO score is between 300 and 850, exhibiting a left-skewed distribution with 60% of scores near the right between 650 and 799.

Once credit has been established and maintained, credit scores are based on five factors to varying degrees: payment history (35%), total amounts owed (30%), length of time (15%), type of credit (10%) and new credit (10%).

The largest impact on credit scores is payment history and amount owed, which is why it is important to pay bills on time.

Debt should be kept to a minimum and funds should be moved around as little as possible. It may be beneficial to leave all accounts open, even if they have a $0 balance.

Different types of credit (ie. mix of credit cards, installment loans and fixed payments) can also be beneficial to a credit score.

However, too many installment loans can negatively affect credit.

Although time is a necessary factor for improving credit scores, this can be controlled by keeping the accounts that are opened during the same time period to a minimum.

By following these guidelines over an extended period of time, credit scores can be maintained and improved in order to improve the borrower’s loan potential and interest rate.

Key Factors That Impact Your Score:

1. Payment History (35%)

It is essential to pay your credit bills on time. Every 30 days late, collection, judgment, or Bankruptcy significantly drops your score.

2. Amount You Owe Compared to Balances (30%)

Your available credit compared to the amount owed. It’s a good rule-of-thumb to be at 40% or less of the available balances

3. Length of Credit History (15%)

Easy rule-of-thumb: the longer your accounts are open, the more positive impact it will have on your overall credit score.  In fact, if you happen to have a card that is over 10 years old with even a little activity, it would probably be a bad idea to close that card.

4. Mix of Credit (10%)

Generally speaking, if you have loans, such as a car loan, as well as open credit cards, it helps prove to creditors that you have experience borrowing money.

5. New Credit Applications (10%)

There is a model that compensates for people shopping rates on home and car loans, but it can hurt your credit score to have multiple reports pulled in a short amount of time.

Factors That DO NOT Impact Credit:

  • Age
  • Race
  • Sex
  • Employment History
  • Income
  • Marital Status
  • If you’ve been turned down for credit
  • Length of time at current address
  • Whether you own a home or rent
  • Information not contained in your credit report

Establishing Credit:

Several factors can be used to establish credit initially, including bank accounts, employment history, residence history and utility bills.

Although they are not reported directly to credit bureaus, bank account history is important to lenders for first time loans and should be kept in good standing.

While they are also not reported to credit bureaus, utility bills (such as electric, telephone, cable and water) can also show a lender the risk associated with a new borrower.

Credit may be initially established through a bank, in which a credit card is linked to a specific amount of money deposited in the bank.  If the credit card is not kept in good standing, the bank can then take the secured funds for payment.

Initial credit may also be established with a department store credit card (for example), but borrowers should beware of the high interest rates associated with these cards and pay off the balances in full.

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Related Credit / Identity Articles: