Looking to purchase real estate in Chicago, but not sure about how your credit score will affect you? As a realtor, I’m often asked a lot about credit scores and what can be done to improve them, so let me share some of what I know.
How Your Credit Affects Your Mortgage
The first thing you should know is how high your credit score needs to be in order to even qualify for a loan in the first place. According to FHA, the requirement for an FHA loan is around 580. For conventional loans, the requirements generally range from 620-640. Of course, the lower your score, the higher interest rate you will have. This will hurt your buying power, because you won’t be able to qualify for as much money. All else being the same, the higher your score, the more money you can qualify for because your payments will be lower.
Here is an example of how your credit score can affect your monthly payment. Say you are looking to purchase a home for 200,000. According to bankrate.com, if your score is 680, your annual rate (or APR) will be around 4.4%. Your monthly payment will be 1,022 (not including taxes & home owner’s insurance to simplify things).
If your score is 620 however, your annual rate would shoot up to around 5.75%, bringing your monthly payment to 1,168. That’s a difference of almost $150 per month! This is why focusing on improving your credit score is so important.
About Your Credit Cards
Want to know some ways to improve your credit? Let’s focus on the main source of your credit: credit cards. If you want to increase your score, the first thing you should do is to work on paying off the balances on your credit cards. The lower your credit card balance is, the better you look to creditors. However, do not close out or cancel any of your credit cards! This may seem backwards, but there is a reason for this. If you close out your credit cards, it then gives you less credit, which will lower your credit score. I wouldn’t recommend running out and getting more credit cards, just stick to the ones you have and keep the balances as low as possible.
Another important thing to keep in mind is your credit utilization ratio. Experian.com recommends to keep your credit utilization to 30% or less. This means if you have a credit card with a 10,000 limit, you shouldn’t use more than 3000 per month on it. This will let the credit bureaus know that you know how to manage your credit responsibly.
Work on Your Past Due Bills
While this may seem obvious, it needs to be mentioned. If you want to improve your credit, you have to pay off any past due bills. Your credit score is a number that tells creditors and lenders how well you pay your debt. If you do not pay off your debt (bill, credit card payments, etc.) in time, it will make you look very bad in the eyes of a mortgage lender. Make sure to pay off any debt or outstanding bills as fast as possible.
Once you take care of all the past due debt, make sure to make all of your payments on time from now on. If your credit score was damaged because of late payments, it can take some time for your score to improve again. Creditors want to see that you can pay your bills on time for an extended amount of time, not just for one or two months. Debt.com suggests that it can take up to 6 months to really start to see an improvement in your score. However, once your credit score improves, you will see how much easier and affordable it is to purchase real estate.
As always, feel free to reach out to me with any questions or concerns. Thanks and have a great day!