Credit Score
You’ve certainly heard a lot about Credit Score and might even have a general idea about its meaning, but if you came to this page you still have some doubts about what is a credit score and we hope to answer it through a real estate prism.
Say you want to borrow some money from a bank. That bank needs to know if they can trust giving their money to you. If you are a responsible person or if you’re just going to spend it and never pay it back. They cannot ask your friends or neighbors about it because even if they give their honest opinion; they can’t rely on opinion, right? So our financial institutions came up with a system designed to protect our financial structure; we call it credit. So, what a credit score does is to position individuals on a scale of trust-do not trust this person with your money.
How does it do that?
Through data management. Whenever a creditor, government authorities, landlords, employers or others who need to know if we are financially responsible are about to get in business with us, they request a credit report to a consumer credit reporting company. This company is constantly collecting information sent by banks, utility companies and several businesses regarding our relationship with them: did we pay our bills in full? In time? Did we spend more than we should? After gathering that data, they assert our financial responsibility level, and a produce a credit report. And what is inside it? Our credit score!
A credit score is never definitive; it’s constantly changing. It usually covers about 7 to 10 years of our lives, so, if you did something really irresponsible, like defaulting a mortgage or something, in 7 to 10 years it will probably stop affecting your score. That’s a curse and a blessing because it means that every little thing can benefit you in the long run. And a good credit score is a long run game.
A credit score is generally measured by a combination of factors:
10% of it is for new credit you get approved to
10% of it is for your credit mix (1 credit card, 1 student loan and 1 mortgage loan > 3 credit cards)
15% of it is for the length of your credit history
30% of it is for everything you owe
35% of it is for your payment history (in full and in time)
And it usually spans from 300 to 850. From 700 up it is considered a good credit score. For Real Estate, if you're applying for a mortgage loan, this is the range you wish to be on. But depending on the moment of the market, you might get it even if you're on the "fair" section of it (around 650-700). When renting, a fair credit score is usually enough; however if the market is hot and the Landlord has a lot of offers, he might favor someone that has a better score than yours. If you're a real estate investor - especially a novice real estate investor without a big history of real estate investments - having the highest credit score you can help make things not only better - with the possibility of negotiating a lower interest rate - but faster too. Lenders have to assess their risk and avoid it the best they can, so, when a credit report brings them a great score, their decision making gets easier because their risk lending you money is reduced. So, as a rule of thumb, always try to improve your number. It will help a lot! Not only in Real Estate but in all areas of your life.
Real Estate tips:
We hope we've helped! Keep searching through our Real Estate Glossary to further understand all the minutia of this complex world that is Real Estate!
Or find a real estate agent and let him/her do all the hard work for you!
Popular Mortgage Terms
Advice on where to go to get a mortgage. A borrower can always select a loan provider by throwing a dart at the Yellow Pages. A referral is of value if it raises the probability of a ...
An interest rate index that is used on some ARMs. ...
The date on which the closing occurs. On a purchase transaction, there is no financial advantage to the buyer/borrower in closing on any day of the month, as compared to any other day. ...
A lender who specializes in lending to sub-prime borrowers. ...
Refinancing that omits some of the standard risk control measures and is therefore quicker and less costly. The rationale for streamlined refinancing is that, while it is an entirely new ...
Fixed rate Mortgage is a type of loan that maintains a specified interest rate for the lifetime (or maturity) of the mortgage.According to the Federal National Mortgage Association, ...
The number of days for which any lock or float-down holds. The longer the period, the higher the price to the borrower. ...
The dollar amount of interest paid each month. The interest payment is the same as interest due so long as the scheduled mortgage payment is equal to or greater than the interest due. ...
A borrower who doesn't pay. ...
Have a question or comment?
We're here to help.