Oahu Real Estate - Chapter 6 - Give Yourself the CREDIT (score) You Deserve
Give yourself the CREDIT (score) You Deserve
After a period when the focus was more on processing mortgages with almost no concern for the long term probability of the loans remaining sound and being paid off, the industry is again looking closely at borrowers past and present circumstances as well as their future probability to make timely payments. The Debt to Income Ratio has returned and any skilled lender will ask for these details. Two of the criteria that you must take into account are the is the debt incurred from your prospective mortgage: Principal, Interest, Taxes, and Insurance (PITI), and the total debt (PITI+credit cards, student loans, car loans, etc...). Ideally, your PITI should equal no more than 25% of your gross monthly income and your TOTAL debt should be no more than 36% of your gross monthly income. Areas of the country with higher than average real estate prices and high costs of living may require you to tweak these numbers a bit, but try not to move too far from them. Your credit score is a key factor used by a lender when determining whether or not to approve your loan. Renters should not assume that they can be lax about their credit health either as more and more landlords are requiring sound credit scores before offering a lease. Credit Bureaus collect your financial activity history and analyze it to determine your credit score. Everything from credit card payments and loans are looked at carefully to see if you pay on time, pay the required amount, the length of time it takes you to pay off the debt is considered. Scores range from 300-850 and you definitely want to be at the higher end. Borrowers with high credit scores are offered lower interest rates on mortgage loans and the difference in your total payments can be huge over the length of the loan. Here is a snapshot of how your credit score can affect your mortgage payments:
Credit Score Interest Rate Monthly Payment
760-850 3.625% $1,368
700-759 3.847% $1,406
680-699 4.024% $1,436
660-679 4.238% $1,474
640-659 4.668% $1,550
****Scores below 640 will make it difficult to get a mortgage loan at any interest rate****
A low credit score cannot be repaired overnight, and the best time to start doing so is now. Get a copy of your credit report from the three big bureaus (Experian, TransUnion, Equifax) and work to clean up any discrepancies. Keep up to date with your current payments and reduce the outstanding debt in as short a period as possible. Do not, simply move deb from one card to another, and do not apply for or accept additional lines of credit when working to raise your credit score and ultimately lower your mortgage interest rate.
