Credit Score

Your credit score is one of the most important factors in determining your interest rate and monthly payments. Simply put, your credit score tells lenders how well you can handle debt and therefore how much risk you pose as a borrower. A high credit score gets you a better rate and more options during your Newport Beach home search.

So what goes into a person's credit score? The Fair Isaac Corporation (FICO) uses the following breakdown:

Payment history: 35%. Lenders want borrowers who have always paid their bills on time. This tells them that they are likely to keep doing so with the new mortgage, ensuring future profits for the lender. This doesn't just include mortgages; it also includes credit cards, shopping credit lines, car loans, and other forms of debt.

Total debt owed: 30%. Your total debt and how you've been handling them will determine how risky you are as a borrower. FICO advises that before conducting your real estate search, you should pay off as much of your current debt as possible.

Length of credit history: 15%. A long credit history means that you've managed to stay above water through the years. If you've only gotten your first credit card at the start of your Newport Beach home search, lenders may consider you a beginner and automatically assume that you're high-risk.

Recent credit: 10%. Every new loan you take out weighs down your credit score. Taking out a lot of credit over a short period is suspicious and adds to your risk level. So if you get a new credit card or pre-apply for several loans before your real estate search, you may actually be hiking up your interest rate.

Types of credit used: 10%. Borrowers who have a good mix of credit types (such as revolving, installment, and consumer finance) are generally considered low-risk borrowers.

What Makes A Good Credit Score?

Credit scores range from 300 to 850. Borrowers should generally aim for a score of 760 and above. Before starting your home search, it's a good idea to know your credit score and see what rates they can get you.

The differences can be drastic. For example, considering a $300,000 loan, a score in the low-risk range can get an interest rate of about 5.5% and a monthly payment of $1,700. A borrower with a 500 credit score will get the same loan for a 10% interest rate and pay $2,600 per month. Taking this difference into account can help you narrow your real estate search to homes you can realistically afford with your current score.