“The difference between a successful person and others is not a lack of strength, not a lack of knowledge, but rather a lack of will.”
The 5 C’s of Credit
Credit is one of the most confusing and misunderstood aspects of buying a house. Good credit is essential not only during the buying process, but after as well. Lenders want to know that you’re going to pay them back if they loan you a bunch of money. One way they decide if your a good risk or not is with the 5 “C”s.
Capacity. What is your capacity, or ability, to repay the loan? They will verify how much income you make, how you make it, and whether your employment history is consistent.
Capital. Capital means money, and the more you have the more they’ll lend you (strange, right?). The lender looks at how much money you’ll put as a down payment, but also how much you’ll have left in the bank just in case you have financial trouble down the road. Large, unexplained deposits into your bank account (from relatives, credit cards, etc.) will be discovered and may not be allowed.
Character. No, not “are you a character?”. . . do you have good character? What’s your credit score? Do you pay your rent, debts, child support, and other financial obligations on time? Here are some steps to improve your credit score:
- Make sure the info on your credit report is accurate. Up to 25% of credit reports have errors serious enough to result in being turned down for a loan!
- Dispute errors with the credit bureau that reports it. (Transunion, Experion, or Equifax)
- Make all of your debt payments on time, early is even better.
- If an account does go past 30 days from the due date, make the payment and maintain a current pay history. After 24 months the impact of the late payment will begin to reduce.
- Limit the number of times anyone “pulls” your credit report.
- Pay off any collections, liens, or judgments against you.
- Keep your credit account balances under 30%. This shows that you can be responsible and not max out all your credit cards.
- Keep accounts you’ve had for a long time, even if they have zero balance. The longer you have an account, the more it will help. Don’t close the account on unused credit cards.
- New accounts can lower your score. Only open up a new credit card or loan when it is absolutely necessary.
- Use a variety of credit types. Having only credit cards or only car loans does not show use of diverse types of credit. It’s good to show a variety of types over time, for example: a car loan, a credit card, store accounts, and a line of credit with your bank. Let’s be very clear, we are not suggesting you go out and get lots of new debt to improve your credit. It’s best to discuss making changes to your credcit with your Mortgage Professional. What seems smart may not be!
Collateral. Collateral is the property you are buying. Does it appraise for what you are paying? Is the roof caving in or are there obvious, sizable defects in the house?
Conditions. Lenders look at what is the local housing market is like. If they had to foreclose on you, could they easily sell the home?
Obviously, you can’t control all these factors. So, the best thing to do is sit down with a lender, explain where you’re at financially, and together, come up with a plan to move you toward qualifying for a loan.