Credit 101 by Yours Truly
Understand how credit works in today's mortgage market place.
Key Takeaway
Long term is more important than short term when it comes to buying a house.
Here's the story: You think you have great credit. Credit Karma says you are running mid to high 700's and you feel pretty bossy about that. And then you go to apply for a mortgage and Mr. Bank says no. Why?
There are of course many different factors in a banks decision. Debt to income ratio for one; how much money you make in relation to how much you owe (or appear to owe, more on that later). Income history is another; how long have you been making your mortgage-worthy salary? 1 year is not enough- noted log.
One of the biggest factors is of course credit. That ever chasing, annoying little number that says how trustworthy you really are. If you are like me, your twenties was incredibly unforgiving to your credit and you have paid for it in high interest rates, rental application explanations and endless "no's" from credit companies. I say it because I've lived it. And through my job and personal experience in fixing my own credit, I give you this blog as a crash course in credit.
Credit works two ways, a "snapshot" and whats called "trending credit data." A snapshot, similar to Snapchat, tells you what someone was doing in a particular moment in time. Trending credit data is more like a online stalker scrolling back in your Facebook profile until the day you joined.
In the past, lenders were more focused on snapshots of your credit. Nowadays, lenders are looking at that trending credit data to uncover how you have managed your credit over time. It is believed that this study will show how you will manage your credit in the future. Fair enough.
This is a good and bad thing, depending on who you are.
1. Good credit, long time. The longer you have maintained your good credit, the better your lending situation will be. Instead of being compared to other buyers with a snapshot of a good score, longtime credit aficionados will be rewarded for their endurance.
2. Good credit, short time. Back in the day someone who just recently got their credit score up could snatch up an easy approval and stellar rate. Today, not so much. If you have been sticking it to your credit for decades and just recently decided to clean up your act, lenders aren't going to trust you with anything, let alone a good rate.
3. Good credit, long term improvement. Bad credit from lack of understanding or mistakes when young, but a long term care and responsibility in relation to the time credit has existed for that person is a plus. This is the standard early to mid thirties individual. Lenders REALLY like to see long-term, consistent improvement.
4. Mediocre credit, minimum payment maker. Making minimum payments does not reduce debt and it increases the amount of interest over time. Lenders want to see consumers pay down debt, not keep it. Especially if you keep racking up the balance.
5. Bad credit, long time, don't care. If you are a more than mature adult with high balances, collection accounts and untimely payments...you are in the hunger games of credit races. I hope you have a super skill in making copious amounts of cash because you are going to need it if you ever want your name on a Grant Deed.
I have many clients that have had to work or are currently working on repairing their credit. The most discouraging part about that, as well as the toughest to understand, is that positive improvement takes more time to register than negative. Your number score may be high, but your mortgage, long term lending of HUGE amounts of money score may not be. Think about it- traditionally, a loan is 30 years. If you can't pay down your credit card, or maintain timely payments with your cable provider, over even 5-10 years, how can a lender trust you to pay for a house?
What you should be getting from this is a mini trifecta of small moves:
1. Manage your expectations when preparing to buy a house. If you need to hire a credit repair company, do it. Are they expensive? Hell yes. Wanna know what's more expensive? Renting. It also won't happen overnight.
2. Start doing the right thing today. Pay down those limits. Some people say 40% or lower, I say 20% if you have a purchase in mind.
3. Stop buying avocado toast. It's delicious. It’s paleo. I think. Shit it's trendy. And it's a complete waste of money and/or credit. If you think you want to buy a house in the next 1-5 years, stop making the "fuck it I deserve it" purchases. More down can aid in credit unworthiness. The worst person to be to a lender is someone with shaky trending credit data and no down payment.
Need more help or want to talk this over? Call me.