The Greater Seattle area housing market beckons with its vibrant energy, breathtaking nature, and booming economy. For many, the dream of owning their own home in this great place to live is tantalizingly close. But first, they must navigate the sometimes confusing world of credit scores and mortgages.
If you’re an aspiring Seattle area home buyer, keep reading. This guide will help you understand the intricacies of credit scores, their impact on mortgage lending in the Seattle area, and practical strategies for improving your credit score so you can finally buy that dream home you’ve been wanting.
What Is a Credit Score?
Your credit score, a three-digit numerical rating, plays a very important role in determining your mortgage eligibility and interest rates. Think of it as your financial report card, reflecting your responsible borrowing habits and repayment history.
Credit scores range from 300 (lowest) to 850 (best), with 720 and higher considered “good” credit in most cases. The higher your score, the more creditworthy (i.e., reliable) you appear to lenders. Consequently, the higher your score, the lower your interest rate. Mortgage Investors consider lending to people with “good” credit to be less risky than lending to those with poor credit. That’s because people with “good” credit scores have proven that when they borrow money they will pay it back on time every month and not have any “late payments.” Conventional mortgages, the most common, typically require a minimum credit score of 620. “Government Loans,” such as FHA and VA loans, can go as low as 580. If you are at the low end of the credit score range, expect to pay significantly higher mortgage rates than borrowers at the top of the credit score range. To get the best (lowest) mortgage rates, you typically need a credit score of at least 780 or higher. There are several different mortgage rate categories between the low end and the high end of the credit score range. Your mortgage rate will decrease for every 20 points that your credit score increases.
How Is My Credit Score Calculated?
Here’s a breakdown of the critical factors that contribute to your credit score:
- Payment History (35%):
- Timely payments on credit accounts, including credit cards, loans, and mortgages, significantly impact your credit score positively.
- Late payments, defaults, or bankruptcies can have adverse effects, so maintaining a consistent history of making EVERY payment on time each month is critical to building a good credit score.
- Credit Utilization (30%):
- This factor considers the ratio of your current credit card balances to your credit limits. Lower credit utilization ratios are favorable, indicating responsible credit management.
- If possible, try to keep your credit card balances below 40% of the available credit limit to improve your credit score.
- Make sure to have at least 3 ACTIVE credit accounts that you use every month. Having NO active credit is almost as bad as having poor credit! If possible, pay all off your credit cards in full every month so you never carry a balance from month to month and accrue interest.
- Length of Credit History (15%):
- The amount of time your credit accounts have been active influences your credit score. Longer credit histories generally contribute to higher scores.
- While you can’t change your credit history’s length overnight, it underscores the importance of establishing and maintaining credit responsibly over time.
- Types of Credit in Use (10%):
- Lenders want to see that you can manage a wide range of credit types, including installment loans, credit cards, and mortgages.
- However, opening multiple new credit accounts in a short period can be viewed negatively, so it’s advisable to manage credit applications judiciously and to not open more new accounts than necessary at any point in time.
- New Credit (10%):
- This factor considers recently opened credit accounts and recent credit inquiries. Be cautious about opening several new accounts in a short timeframe, as it may be interpreted as a financial risk because it looks like you may be desperate for money.
- Mortgage inquiries within a specific time window (usually 30 days) are typically treated as one “credit pull” to minimize the impact of talking to more than one mortgage lender during the loan application process.
Understanding these credit score factors provides a strategic roadmap for properly managing your finances to improve and maintain a healthy credit score. Proactively address each of the following elements to build a strong credit history and obtain a high credit score:
- Always pay every bill (no matter how small) ON TIME each and every month.
- Keep the balances on your credit cards as low as possible.
- Keep your oldest accounts open if possible (for example, do not close a credit card account with a good payment history, even if you no longer use the card)
- Manage the various kinds of credit wisely and only apply for new accounts when necessary. While keeping old accounts may be helpful, you don’t want to
have TOO many open accounts on your credit history.
Of course, your financial health is based on more than just a credit score. Building a strong foundation also requires:
- Budgeting: Track your income and expenses; create a realistic budget that prioritizes savings and debt reduction.
- Debt Management: Tackle high-interest debts first, using repayment strategies that prioritize using any extra money to pay off those high-interest accounts to reduce your monthly debt expenses.
- Saving for a Down Payment: Ideally, you would save at least 20% of the home price, but for many home buyers, that is not realistic. So concentrate on saving as much money as possible. The more money you have in the bank, the stronger your loan application looks to mortgage lenders. You may be able to buy a home with as little as 3-5% down, and veterans & active military can use a VA loan to buy a home with NO MONEY DOWN.
- Seeking Professional Help: Don’t hesitate to consult a financial advisor for personalized guidance and a tailored roadmap to your financial success.
Your Seattle Area Dream Home Awaits
By demystifying credit scores, understanding the Seattle area mortgage landscape, and implementing these practical strategies, you can achieve financial well-being and unlock the door to your Seattle area dream home. With dedication and smart financial choices, owning your next home is closer than you think.
Ready to make your Seattle area home-buying aspirations a reality? Best Mortgage, a family-owned Bellevue, Washington-based lender with more than 31 years of experience, is your trusted loan advisor r in securing a mortgage in the Greater Seattle, WA area that aligns with your personal financial needs and goals. Contact us today by calling (425) 649-6000 or submitting our Contact Form, and let our expert loan advisor team guide you through your home-buying journey with confidence and clarity.
