With home values rising over 25% in San Diego over the last few years, competition is fierce among homebuyers vying for a limited number of properties. This intensifying market makes walking into the home buying process with a strong credit profile more important than ever. Your credit score can impact everything from loan eligibility to interest rates and fees. This comprehensive guide will delve into how credit scores work, their role in the mortgage approval process, and tips for positioning yourself as an attractive borrower.
Demystifying Credit Scores
What Factors Determine Your Score?
At its core, a FICO credit score is a three-digit number mathematically calculated based on information in your credit reports. Scores range from 300 to 850. The higher the better, with most people falling between 600 and 750.
Generally, a score above 700 is considered good credit, and will qualify you for better loan terms. An excellent score is typically 740 or higher. But what exactly determines your score? Let’s explore the five key factors:
Payment History – 35%
Your payment history carries the most weight at 35% of your score. This reflects your track record of making payments on time, including:
- All credit accounts – mortgages, credit cards, auto loans, student loans
- Payment due dates, late payments, delinquencies
- Severity of delinquencies – 30, 60, 90 days or more
- Public records like bankruptcies, judgments, tax liens
A longer history with perfect on-time payments helps your score the most. Even one 30-day late can drop your score significantly. Multiple delinquencies have an even greater negative impact. Avoid late payments whenever possible.
Credit Utilization – 30%
The second biggest factor at 30% is your credit utilization, or how much of your total available credit you are using. This is calculated by dividing your total balances by total credit limits on revolving accounts like credit cards.
Lower utilization is better. Experts recommend keeping usage below 30% of available credit. Maxing out cards or using over 50% of limits will hurt your score. Paying down balances and increasing credit limits can lower utilization.
Length of Credit History – 15%
This factor, accounting for 15% of your score, relates to how long your credit accounts have been open. This includes the age of your oldest account, newest account and average across all accounts.
Having long-standing accounts demonstrates stability. Average history should be at least a few years, but longer is better. Too many new accounts can lower this portion of your score.
New Credit – 10%
New credit makes up 10% of your score. This reflects how many new accounts you’ve opened and credit inquiries in the past 12 months. Opening many new accounts in a short period raises lender risk, negatively impacting your score.
Every application triggers an inquiry, so limit new credit only to when truly needed. Too many new accounts or inquiries hint at financial troubles or overextending credit.
Credit Mix – 10%
The final 10% of your score is based on your credit mix, or the different types of credit accounts you have. These include:
- Revolving credit (credit cards)
- Installment loans (mortgage, auto, student, personal)
- Retail credit accounts
- Finance company accounts
Having a healthy mix covering a few different account types demonstrates you can manage diverse credit. Revolving credit alone isn’t ideal. Installment loans help round out your profile’s diversity.
This wide mix of detailed payment behaviors informs your score. Monitoring these factors through your credit reports allows you to pinpoint areas to improve your credit health.
Why Credit Score Accuracy Matters
With your score influencing so much, it’s critical that it accurately reflects your current credit health. Here’s how to ensure it does:
- Check all three credit reports annually for errors – Equifax, Experian, Transunion. Dispute any mistakes.
- Monitor score fluctuations. A 50+ point drop could indicate problems.
- Review factors driving score changes each month.
- Ensure positive history is being accurately tracked.
Armed with your true score, you can determine if improvements are needed before applying for a mortgage.
How Mortgage Lenders Use Credit Scores
When reviewing a mortgage application, lenders conduct an in-depth analysis of the borrower’s credit reports and scores. They use this credit profile assessment to determine loan eligibility and terms. Below are key ways credit scores influence the mortgage underwriting process:
Meeting Minimum Score Requirements
Most mortgage lenders have set credit score cutoffs that loan applicants must meet to qualify for financing:
- Conventional Loans: Require minimum scores of 620-680 for standard conforming loans backed by Fannie Mae and Freddie Mac. Those with lower scores will need to pursue an FHA, VA, or subprime loan.
- FHA Loans: Have lower score requirements between 500-580. This makes them more accessible for borrowers with weaker credit.
- Jumbo and Non-Conforming Loans: These typically call for higher scores of 700+. Luxury jumbo loans above conforming limits may require 720+.
- Not Meeting Minimums: Applicants with scores below 500 will likely not qualify at all without a co-signer or significant backup collateral like cash reserves.
Down Payment and Equity Requirements
Borrowers with lower credit scores are often required to make a larger down payment, usually:
- 10% to 20% down compared to 3% to 5% for better scores
- This compensates for higher risk with more equity invested upfront
Likewise, maximum loan-to-value ratios decrease for lower score borrowers. This further safeguards the lender against default exposure.
Impacts to Interest Rates
The strongest credit profiles receive the lowest mortgage interest rates from lenders. Just a 50 to 100 point score difference can equal .25% to .50% higher rate. For example:
- 760+ = Prime rates
- 720 to 750 = Above average rates
- 680 to 719 = Slightly elevated rates
- 620 to 679 = High subprime rates
Over the life of a mortgage, a higher rate can cost tens of thousands in extra interest due to a lower score.
Loan Amounts and Debt-to-Income Ratios
To qualify borrowers with poor credit, lenders restrict loan amounts to keep overall monthly debts including the mortgage payment below 45% of gross monthly income. This ensures borrowers aren’t overextended.
Whereas borrowers with excellent 750+ scores may qualify for a loan up to 5x their income, lower credit means loan amounts limited to 3x income or less. This also impacts purchasing power.
Added Fees and Costs
Those with low credit scores often incur extra lender fees like:
- Higher origination fees adding 0.25% to 1% to loan costs
- Added underwriting fees of $500+
- Private mortgage insurance premiums
Weaker scores essentially represent higher risks that lenders account for through stricter terms and higher costs. Improving your credit before applying pays dividends.
5 Strategies for Boosting Your Credit Score
Improving your credit score enough to qualify for the best mortgage rates can take diligent work over 6-12 months. Here are proven techniques to implement:
- Aggressively pay down balances to below 30% of limits, with lower being better. This greatly reduces credit utilization.
- Thoroughly dispute any errors on your credit reports and get them corrected by the bureaus. Wrong late marks or balances severely hurt.
- Limit new credit card or loan applications in the 12 months prior to your mortgage application. Too many inquiries and new tradelines can temporarily knock down scores.
- Request credit line increases on existing revolving accounts after 6+ months of on-time payments. Higher limits mean lower utilization.
- Maintain perfect on-time payment history and keep long-standing accounts open. Let positive history age and offset past issues.
In addition, a less known but highly effective strategy is becoming an authorized user on someone else’s well-managed, seasoned credit card account. A family member or spouse can add you as a user to their account but you don’t ever have to actually use the card. You automatically benefit from the positive history and higher limit helping your score.
Other supplementary moves include allowing time to pass since any past delinquencies, and responsibly opening new types of credit like installment loans and secured cards to diversify your mix.
Implementing a combination of these tactics starting today will maximize your credit profile over time. Higher scores unlock lower mortgage rates and better loan terms, saving you thousands.
Navigating San Diego’s Competitive Housing Market
While lenders weigh credit scores uniformly across markets, San Diego homebuyers face some unique challenges:
- Prices rose over 25% in 2021-2022 outpacing wage growth. Home prices now average $950,000.
- Bidding wars are common with homes receiving 5-10 offers. Cash or flexible terms help.
- Supply shortages and new construction lag demand, creating an undersupplied market.
- High demand for condos and new builds make those property types even more competitive.
These daunting factors mean having your financial ducks in a row is essential. Work with a trusted lender like Mission Federal Credit Union to determine your approval odds and optimize loan terms through credit enhancement. Preapproval early in your home search can also give your offer an important edge.
Strong Credit is Key to Unlocking Your Dream Home
In the face of a rapidly escalating housing market in San Diego, where home values have surged by over 25% in recent years, the competition among prospective homebuyers is becoming increasingly fierce. With a limited number of properties available, the market dynamics have intensified, making it more crucial than ever to enter the home buying process with a robust credit profile. Your credit score can significantly influence various aspects of your home buying journey, from loan eligibility to the interest rates and fees you’ll be offered.
I am committed to collaborating with you to leverage your credit to make home buying possible. With an in-depth understanding of the San Diego market, I can guide you through the process of building an unbeatable loan application. The first step is understanding where your credit stands today and strategizing how high it can climb. With a strong credit profile, you can unlock your dream home in San Diego’s competitive housing market.
