Nope, that won't help your score

A new survey conducted by TransUnion indicated that home buyers may not be as prepared to purchase a home as they thought. The survey revealed that those looking to buy a home within the next 12 to 18 months are not cognizant of the actions that could help improve their credit score, and the majority of respondents did not understand how their credit score affects their ability to obtain home financing.

The survey found that almost 75 percent of potential home buyers believe it’s important to check the accuracy of their credit report, but only 45 percent understand what the score quantifies: The likelihood that you’ll default on your debt in the next 24 months. One in three believed that increasing their income (33 percent) or closing old accounts (28 percent) before applying for a mortgage could improve their credit score. Both these assumptions are false.

But YOU know better, right? Your credit score is affected by the way you’ve handled your credit in the past. 35% of your score is based on your credit repayment history, 30% is based on how much you owe (as a percentage of your reported credit limits), 15% is based on the length of your credit history, 10% is based on the type of credit you use (A-rated companies vs. finance companies) and 10% is based on recent credit inquiries.

Since we can’t tell the future, your past performance is the best indicator of how you’ll behave in repaying your mortgage. Income itself is not a factor, and closing old credit accounts can make your score worse because you’re shortening your history.

Most definitely check your credit scores at MyFico.com if you think there are issues. On their site, you’ll have access to calculators telling you what actions you can take to get a better score. And yes, a “better” score does matter. Even if you’re putting 20% down, a score of 640 will cost you two-and-a-half points more than a 740 score. On a $200,000 loan that’s equal to $5000.

In the end, it’s the same old song: Contact your Mortgage Advisor well in advance of needing home financing. The rules continue to change, and you need expert advice to help you make the best decisions about the largest debt you’ll ever incur.

Tammy Engel is your local Mortgage Advisor, and has been working for your best interest since 1990. Contact her at 661/822-7325 for purchase, refinance, and reverse mortgage.