Real Estate and Your Credit Score
The most widely known and used credit score is the FICO (Fair Isaac Corporation) score. This is a proprietary software system that collects information from the three credit bureaus, Experian, TransUnion and Equifax, and blends them into what is called a trimerge report. The software assesses the risk of loaning you money and the likelihood that you may default on the debt. The scores range from 300 - 800.
The following five factors influence your score:
1. Payment History: 35% of your score.
Payment history includes the number of delinquent accounts, late payments, collections and judgments. The severity of the account in arrears is also a factor, i.e. a late mortgage payment is worse than being delinquent on your pet's veterinary bill.
2. Amounts Owed: 30% of your score.
Maxing out your credit limits will lower your score. The number of your credit balances can also lower the score. As contradictory as it seems, having too much credit can be a bad thing. Be careful to close any accounts as #3 enters the picture.
3. Length of Credit History: 15% of your score.
The longer you have an account open, the higher your score. If you have a long-term account and it is closed, your score will be negatively impacted, not by much and not for long. But certainly do not close old accounts just before applying for a new loan. Activity counts also, so use that old account a few times every year and pay it off immediately to keep your score healthy.
4. Types of Credit: 10% of your score.
Lenders like to see that you can handle different kinds of credit, revolving accounts, and long-term loans. Having only one kind of credit with affect your score adversely.
5. New Credit: 10% of your score.
If you apply for and receive several new forms of credit in a short time span, it will be considered a negative factor. It only accounts for 10% of the total score, but use common sense. If you are preparing to obtain a car loan or a new mortgage, do not go on a new credit card binge. Timing in this instance is important.
There are several items that will not affect your credit score: some are obvious, such as your race, religion, age, or your marital status. Perhaps not as obvious are other factors like your employment history, any past involvement in credit counseling, the interest rates of your credit cards or other loans, and whether you have child and/or alimony obligations.
The criteria to determine your score does not change with the economy. But the score needed to qualify for a loan does change. In this Great Recession you need a 720 FICO to qualify for a loan that two years ago only would have needed a 700. In recent years most lenders would have given you the very best loan rates and terms if you had a 725 FICO. To obtain the best loans possible today, some lenders are requiring a score in the range of 750-775.
The ideal investor today would have a minimum FICO score of 720, a down payment of 20 percent, less than four financed properties (some lenders allow up to 10) and six months of reserves for routine expenses. Some lenders in today’s environment actually require six months of reserves for EACH property. It is not common but certainly possible to see such a strict new requirement, unheard of just a few years ago. For a “high risk investor" (someone with 11 properties) a FICO of 800 with 50 percent down and reserves in the six figures still will not qualify for a soft money loan. If you are in this position, you can only purchase through a hard money loan at outrageous interest rates and short terms, or as we are seeing increasingly in the Network, you happen to be among that fortunate group of people who have a down payment of 100 percent.
Do not despair if your credit situation isn't ideal--economically speaking, everything is a moving target. While we hope never to have another lending environment like the one that created this mess, where anyone who was upright and breathing could qualify and liars’ loans were the norm, the pendulum will soon swing back. The lending process WILL become more reasonable. In the meantime, buy something if you can...it will be many years before America goes on sale again.
+Marshall Reddick