Yes, credit can impact your loan terms even if you can qualify for a home loan. This is one of the most important factors on what loan terms you will get and/or if you can qualify. Credit scoring is used for almost all major purchases, but there is little education on this subject. Your FICO credit score is made up by the following factors.
1. Payment History – 35% of your credit: The biggest part of your credit is the simplest one... pay your bills on time. :-)
2. Money Owed – 30% of your credit: Starting out most people make the mistake of taking out new credit and running up the balances. This is the opposite of what you want to do. When you get new credit keep the balances low (10% to 30% max).
3. Length of Credit History – 15% of your credit: It's important to start with good credit utilization at the earliest age you are financially responsible to do so. This will help earn you a better score when you ready to purchase a home. When I'm asked what age someone should purchase a home, I always answer with, "at the youngest age they are financially responsible to do so.” For some people, this is 18. For others, this may be 80, but the younger you become a homeowner the better opportunity for increased net worth by the appreciation compounding on the real estate and the principal reduction of your loan. Because purchasing a home relies so heavily on credit (terms and/or qualifications), it's important to responsibly start building your credit history at an early age.
4. New Credit – 10% of your credit: It's important when starting out to not fall into the trap of taking out a large amount of credit (high dollar amount) all at the same time. Especially, if you have a small amount of credit history (for example, you haven’t opened many credit cards or had an auto loan previously) this can be seen as a higher risk and can lower your score.
5. Types of Credit in Use – 10% of your credit: You should not open new credit you do not intend to use, however, it's also not a good idea to have a bunch of one type of debt (i.e., credit cards). Instead, try to limit this amount of debt to maximize your credit score.
For more tips on how to improve your credit score click here.
MTG Family Mortgage is a DBA of Open Mortgage, LLC (NMLS #2975, nmlsconsumeraccess.org) is a Kansas Licensed Mortgage Company. Lic. # MC0001373-BR033. Michael Gonzales NMLS #221988, LO.0001288 (Branch NMLS #327320). 2290 N. Tyler Rd., Suite 200, Wichita, KS 67205. Equal Housing Opportunity Lender.
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