Credit Scores: What Is It Good For?

A credit score is an extremely important financial tool. It provides access to the financing you need in order to buy a car, a home, or pay for college tuition, among other things. Since higher scores equate to lower financing costs and vice versa, it’s vital to understand the factors involved in calculating your score.

A credit score is a numerical expression based on a statistical analysis of a person’s credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information typically sourced from credit bureaus.

Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. Lenders also use credit scores to determine which customers are likely to bring in the most revenue. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system.

Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, landlords, and government departments employ the same techniques. FICO is a publicly traded corporation (under the ticker symbol FICO) that created the best-known and most widely used credit score model in the United States.

Here are the five elements that make up a credit score, in order of importance:

Payment History

35% impact. Paying debt on time has a positive impact. Late payments, judgments, and charge-offs have a negative impact. Delinquencies that have occurred in the last two years carry more weight than older items. When applying for a mortgage, every point in your credit score can make a big difference. So don’t make any major financial or credit decisions – even paying off an old debt or delinquency – without first discussing it with your mortgage professional.

Outstanding Credit Balances

30% impact. This factor marks the ratio between the outstanding balance and available credit. Ideally, consumers should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when planning to enter into a loan transaction within 3-6 months.

Credit History

15% impact. This marks the length of time since a particular credit line was established. A seasoned borrower is stronger in this area.

Type of Credit

10% impact. A mix of auto loans, credit cards, and mortgages is more positive than a concentration of debt from credit cards alone.


10% impact. This quantifies the number of inquiries (or requests for credit) that have been made on a consumer’s credit history within a 6-12 month period. Each individual inquiry – up to 10 – can hurt your credit score by as much as 5 to 30 points. Any additional inquiries thereafter will not affect your credit score.

In other words, don’t start the loan process until you’re ready to act. Otherwise each individual credit inquiry could cost you. However, scoring models have now been adjusted to count multiple “hard” inquiries within a 45-day period as a single request. So, when you’re ready, your credit will be too.

If you or anyone you know has any questions about credit scores or what can be done to repair them, please don’t hesitate to contact me. I work with several mortgage brokers and lenders that can assist you in your financing needs.

Avoiding Pitfalls of a Low Appraisal

The phone rings. It’s your lender or REALTOR®. Your home appraisal just came in below the negotiated sales price. What was shaping up to be a smooth home purchase just got rocky because the lender won’t loan the amount the buyers need to buy the home. With uncertainty surrounding property values across the USA, a low property appraisal has become much more common.

Appraisers aren’t villains, but they can be your worst enemy at times.  Because inflated appraisals are much to blame for the housing boom and crash, appraisers’ jobs are literally on the line every time they set a value of what a home is worth.  Due to the heat and scrutiny that appraisers face, they are much more critical about every property that crosses their desk.

The rules have changed and lenders can no longer select the appraiser as it was felt that sometimes the appraiser was influenced to bring in whatever valuation was needed to put the deal together. And that may have contributed to inflated property values which then lead to the real estate problems we are trying to work through.

So what do you do when such a situation arises that could kill the deal? First, stay calm and don’t assume the deal is lost. Get in touch with your real estate agent and run through the options. Working with an experienced agent that knows the market is crucial when dealing with the pitfalls of a low appraisal.

Remember, if you made it this far in the negotiations, everyone involved is probably operating in good faith. All parties would like to see the transaction close. Given those assumptions, your options include:

  1. Dispute the Appraisal
  2. Talk with your Lender
  3. Buyer Pays More Down
  4. Seller and Buyer Negotiate
  5. Seller Reduces Price

1. Dispute or Appeal the Appraisal

Talk with your REALTOR®. Is the contract sales price a fair assessment of the property value based on a well-prepared comparable market analysis (CMA)? Disputing the appraisal may sound out of the norm, but to dispute a property appraisal could be reasonable depending on a few key factors:

  • Where is the appraiser based? Did they perform an appraisal in a housing market that they may not know well?
  • Did the appraiser have adequate information about the subject property? Did he know about all the upgrades, any recent renovations, or landscaping? Did he have information about less obvious factors like a unique fireplace, rare light fixtures?  Highlight the selling points and information about your home that makes it stand out.  Have your agent provide the appraiser with a list of these and little known benefits the neighborhood offers like schools, parks etc. Sometimes being under the gun to get the appraisal done, the appraiser may not notice or know these nuances.
  • Carefully review the appraisal report and make sure there were no errors or omissions. Perhaps hardwood floors or granite countertops were items of value that the appraiser overlooked. Maybe he missed a room, bathroom or guest quarters. Is the square footage accurate. Did he account for the number of garages, fireplaces, and so forth.
  • What were the comparable properties that were used in the appraisal? Were the comparable properties fair? Oftentimes, agents involved in the transaction have actual knowledge of the comparable properties, and can assist the appraiser. Your agent can help to submit other comps that may be better suited to your property for the appraiser to reconsider value.

After providing an appraiser with a handful of further pertinent comparables, the appraisal can sometimes be adjusted to come in at the contract sales price. The appraiser may or may not be willing to adjust the numbers, but they should consider all pertinent information, in order to do the job they are paid to do.

2. Talk with your Lender

If the appraiser is standing firm on their assessment of the property, speak with your lender about the possibility of ordering a new appraisal. The lender does have the ability to override the appraisal estimate (very unlikely to occur) or order a new appraisal (more likely). If a new appraisal is ordered, talk with your REALTOR® about somehow splitting the cost. Perhaps the listing agent and selling agent and seller will split the fee in order for the buyer does not have to incur the additional costs of a new appraisal.

However, if the lower appraised value is in line with prices of comparable sold property, then it is unlikely that it will change with a new buyer or appraiser.

3. Buyer Pays More Down

If the home buyer desires the home badly enough, making a larger down payment may be a possibility. One issue here is that by having the buyer pay more down, it establishes negative equity in the home. That is, the amount of the loan plus the larger down payment is greater than the appraised value of the property. It should be noted that even if the buyer is willing to take this risk, the lender may not approve a loan under these terms.

4. Seller and Buyer Negotiate

Having an appraisal come back below the contract sales price may open the door to re-negotiation between the seller and buyer. A little give-and-take has probably taken place up to this point, and both parties may want to continue negotiating in order to bring the property to close.

5. Seller Reduces Price

Given the situation, the seller may be willing to negotiate to save the sale of their property. However, if there was a hard negotiation on sales price and inspection items, the seller may not be willing to take this course of action.

At the end of the day, all parties want to see the property appraised at a fair value, which should be as close as possible to the contract sales price. The thing to remember is that a low appraisal does not necessarily mean a dead deal.  If buyer and seller are motivated, most issues can be resolved.   The bottom line is that no one can force you to buy or sell a home at a price that you are not willing to accept or pay. Although a low appraisal throws a glitch into the deal, always remember that You are in control.

Your Buying Power

Experienced home buyers know that one of the first-steps in beginning a successful search for a new house is taking a hard, objective look at finances. Determining how much money you can dedicate to the purchase of your new house affects almost every aspect of buying a new home – including how we write the offer, which mortgage programs you will qualify for, shopping for the best mortgage loan and which homes are truly in your price range.

Here are the questions that each home buyer should ask:

  • How much cash is available for a down payment? The amount you have available for a down payment will affect what types of loans for which you can qualify. Learn more.
  • Am I ready to write a check for the earnest money? Earnest money is a cash deposit made to a home seller to secure an offer to buy the property. This amount is often forfeited if the buyer decides to withdraw his offer.
  • How much additional cash will be available to pay for closing costs? There are certain standard costs associated with closing the sale of a house. These fees are split between the buyer and the seller, as spelled out in the sales contract. Learn more.
  • What is the maximum monthly mortgage payment that I can afford? Most lenders will use the 28/36 rule to determine the maximum mortgage payment you can afford.

The 28/36 Rule
No more than 28% of your gross income can be applied to your mortgage, real estate taxes and insurance. And no more than 36% of your gross income can be applied to your mortgage expenses plus your regular debt expenses (car payments, credit cards, other loans, etc.).