Whether you are looking to buy a home or refinance, there are three things that we, as the lender, look at while considering your application. We call these the three pillars, Credit, Savings, and Debt-to-income ratio.
Let’s start with the first pillar, Credit. Here’s a quick snapshot of what goes into your credit score:
As you see above, 15% of your score depends on the length of credit history – not something that usually comes to mind when you think ‘credit score’. This is why we recommend making sure to keep the first credit card or credit line you opened, even if it has a lower limit. Closing those early cards can have a big impact on your “length of credit history” – so even if you’ve got a better ‘go to’ card now, keep those first lines open!
Another impact on your score could be how often you open up new credit accounts - this makes up 10%. Every time you open a new loan or line of credit, the ‘inquiry’, or credit pull, impacts your score for 2 years! If you were to open up several accounts in a small period of time, it could negatively affect your score. This includes things like store credit cards – not only do they charge higher rates, but getting a bunch of them for the ‘discounts’ during shopping seasons can have a bigger impact on your score than you think!
Making up 35% of your score, which the largest single factor, is ‘Payment history’ – this is the one that usually comes to mind when we think about our credit score. Basically, this just indicates whether you have made your payments on time or not. A 30 days past due payment will negatively affect your score, so even if you can’t make your payment on the exact due date, make sure you’re making it within 30 days. If you are ever struggling to make a payment on time, we would always advise reaching out to the institution to see how they can help.
The second largest factor of your score is “Amounts owed”. You may have heard this called ‘debt utilization’. Basically, this gets out how much of your available credit you are currently using. For example, if you have $1,000.00 in available credit and are using $900 of it your utilization is at 90%. The higher your percentage, the more it may impact your credit negatively. This factor looks at your total available credit vs how much is being used – so even if you have one card maxed out, if you have other lines of credit that aren’t as heavily used, your score looks at it overall.
Lastly, the remaining 10% of your score is impacted by your “Credit Mix”. Generally, the mix of credit type are the following: Credit Cards, Credit lines, Installment loan (a car loan is a common installment loan), and Mortgage loans. You do not have to have all of the different types to have a “Good credit score”, but having more than one kind helps.
The second ‘pillar’ is Savings. It can be hard to build up savings, especially when budgets are tight, but one way to make sure you’re putting a little aside each month is to treat savings as another expense to budget for, and commit to it (check out our blog on starting to build savings for more tips!). Though we have a mortgage program that allows 0% down, the more savings you have, the more options we’ll have available, with more flexibility if you can put 3% or 5% down.
Last but not least, is the DTI (Debt-to-income) pillar. This is a formula that looks at how much money you owe to creditors each month compared to how much money you earn. One way to make sure your DTI is in a good range is to borrow only what you can afford, while putting a bit aside for savings each month. We recommend trying to keep your ratio to 45% or less. This means that your minimum monthly dues for any auto loans/lease, credit cards, personal loans, student loans, combined with your anticipated new mortgage payment, should not exceed 45% of your monthly gross (before taxes or deductions) income.
Being in good standing in all 3 of these categories, makes it more likely you’ll qualify for a mortgage preapproval. At TruChoice, we’ve got a great team ready to help you on your home ownership journey – so even if you don’t have all the boxes checked off yet, or aren’t sure what kind of loan you qualify for, or what you need to do to get there, we’re here for you. Reach out today, and we can look at your overall picture and help build a plan to get you into your new home!