In a previous blog, I discussed the importance of financial literacy education as a crucial tool for helping young adults become future homeowners and increase their economic well-being over time. In this blog, I will discuss how one’s credit score can affect the ability to obtain loans, and the cost of those loans.
A credit score significantly determines the terms of your loans and whether you can afford these loans or not. Credit scores are used in evaluating a range of loans such as personal loans, car loans, and home mortgages, so credit scores are equally important for both renters and homeowners.
Your credit score will determine how much you can borrow and the length of your repayment. The higher the credit score, the better the rate on your loan, and the lower the monthly payment.
Because a credit score is a critical determinant of your ability to secure a loan at a low rate, it is important to understand what factors determine your credit score. Knowing what determines your credit score will then help you plan for and work towards improving your credit score. This is all part gaining financial literacy.
Factors Affecting FICO Credit Score
FICO scores range from 300 to 850 with the higher number being the better score and the lower figure representing a higher risk for the loan. When you take a loan, the bank has to assess the possibility of repayment and determine the risk for the loan. Factors that affect the scores are credit card debt, student loan debt, payment history, bankruptcy and foreclosures. Personal or demographic information such as age, race, address, marital status, income and employment do not affect credit scores. Typically, Equifax, Experian, and Transunion run your score and of the three scores, the middle score is what consumers go by.
Data from your credit report goes into five major categories that make up a FICO score. The scoring model evaluates some factors more heavily, such as debt owed and payment history.
Payment history: (35 percent) — Your account payment information, including any delinquencies and public records. Your ability to make payments on time.
Amounts owed: (30 percent) — How much you owe on your accounts. The amount of available credit you are using on revolving accounts is heavily weighted.
Length of credit history: (15 percent) — How long ago you opened accounts and time since account opened.
Types of credit used: (10 percent) — The mix of accounts you have, such as revolving and installment. This would include credit card debt as well as student loans or mortgage payments.
New credit: (10 percent) — Your pursuit of new credit, including credit inquiries and number of recently opened accounts. This includes secured and unsecured credit cards.
The Urban Institute provides a monthly chart book on housing finance. This chart shows Fannie Mae’s loan level price adjustments LLPAs, which are, expressed as upfront charges. The higher the credit score the lower percentage of the charge assessed. A higher loan-to-value will increase the percentage of payment but we can see the impact of the lower credit score pushing up the charges assessed. “Simply put, LLPAs are added charges for certain risk factors on a mortgage. They are high loan-to-value (LTV), low credit scores, cash out, investment property, etc. They are calculated and assessed as a percentage of the loan amount. For example, if the loan amount is $100,000 and the total LLPAs equals 0.25%, the charge would equal $250.” Posted by the mortgage calculator.
Improvements in the Credit Score Models
It would be significant to consumers if monthly rent payments and utilities were included in their FICO scores. Many renters may be paying these bills in a timely fashion but they would not appear on your credit report. While some credit agencies may have rent payments as a part of their credit scores, there is no guarantee they are included in the scoring figure because rent data is not standardized. However adding that to the credit reports seems to be the trend moving forward.
The Vantage score 3.0 is a newer model used to run credit reports. This newer system is supposed to have a more consistent credit-scoring model. The Vantage system is helpful to those who do not have much, or have very little credit history. The most recent Vantage system is the 4.0 system, which is supposed to give lenders a deeper look into a consumer’s credit history. It also does not hold consumers to the usual standard of FICO scores giving them some leniency on medical accounts and tax liens for example. For mortgage, underwriting lenders Fannie and Freddie are more likely to use traditional FICO scores.
How to Improve Your Credit Score
Paying off credit cards in a timely fashion as well as paying more than the monthly minimum is helpful. Some consumers apply for 0% annual percentage yield (APR) balance transfers to save money on interest paid over that period. Those who have credit card debt not only want to maintain their monthly payments on time but they also want to make sure they are not using more than 20-30% of the credit line limit. Some financial consultants recommend using even less between 10-20%, which would benefit your credit score and reduce your monthly payments based on your APR.
Keeping track of your debt is paramount. One can pay down the debt as well. Some consumers are using tax returns to pay down debt.
Paying your school loans on time will also be beneficial for your credit scores. Most consumers who have student loans also are likely to have new lines of credit and still trying to establish credit. School loans make up a large portion of debt held by many Americans. Based on NAR 2017 Student Loan Debt and Housing survey data, in some instances, debt levels can reach over $100,000, which would take decades to pay back. Based also on NAR survey data, 32 percent of respondents from a national sample indicated that they defaulted or forbore on their student loans. This would not help to increase and improve your credit score.
Look at this article also on how to improve your credit score
You can also check your credit scores free annually so knowing your score is helpful for how you plan your future moves. While some states may have higher credit scores than others, credit scores are driven by individuals and depend on several factors. Some of those factors are income, where you live, poverty levels, and financial literacy. Being on top of your credit will keep you prepared for future financial decisions. Some consumers turn to credit repair resources such as LAJ Financial Solutions, Credit Saint, or Lexington Law, that can help remove blemishes from your credit report. Also learning how to leverage your credit will expand consumer’s options on future investments and strategies. Some homeowners can leverage their credit to obtain a FHA or VA loan to get a secondary mortgage.
NAR released a summary of existing-home sales data showing that housing market activity this February, bounced back and was up 11.8 percent from January 2019. Despite the month over month gains, sales of existing-homes dropped 1.8 percent from February 2018. February’s existing home sales reached a 5.51 million seasonally adjusted annual rate, the highest since March 2018.
The national median existing-home price for all housing types was $249,500 in February, up 3.6 percent from a year ago. This marks the 84th consecutive month of year-over-year gains.
Regionally, all four regions showed growth in prices from a year ago. The Midwest had largest gain of 5.4 percent followed by the Northeast with a gain of 3.8 percent. The West had an increase of 3.0 percent followed by the South with an incline of 2.5 from February 2018.
February’s inventory figures are up from last month 2.5 percent to 1.63 million homes for sale. Compared with February of 2018, there was a 3.2 percent increase in inventory levels. It will take 3.5 months to move the current level of inventory at the current sales pace. It takes approximately 44 days for a home to go from listing to a contract in the current housing market, up from 37 days a year ago.
From January 2019, three of the four regions showed inclines in sales while the Northeast was unchanged. The West had the biggest gain of 16.0 percent followed by the South with an incline of 214.9 percent. The Midwest had the smallest increase of 9.5 percent.
Two of the four regions showed declines in sales from a year ago and the Midwest was flat. The Northeast had the only gain in sales of 1.5 percent. The West had the biggest decline of 7.9 percent followed by the South with the smallest drop of 0.4 percent. The South led all regions in percentage of national sales, accounting for 43.4 percent of the total, while the Northeast had the smallest share at 12.5 percent.
In February, single-family sales were up 13.3 percent and condominiums sales were unchanged to last month. Single-family home sales fell 1.4 percent and condominium sales were down 5.0 compared to a year ago. Single-family homes had an increase in price up 3.6 percent at $251,400 and condominiums modestly rose 3.1 percent at $233,300 from February 2018.
NAR released a summary of existing-home sales data showing that housing market activity this January, fell for the third straight month and was down 1.2 percent from December 2018. Sales of existing homes dropped 8.5 percent from January 2018. January’s existing home sales reached a 4.94 million seasonally adjusted annual rate, the lowest since November 2015.
The national median existing-home price for all housing types was $247,500 in January, up 2.8 percent from a year ago. This marks the 83rd consecutive month of year-over-year gains. Despite the gains in prices, this January marks the slowest price growth since February 2012.
Regionally, all four regions showed growth in prices from a year ago. The West had largest gain of 2.9 percent followed by the South with a gain of 2.5 percent. The Midwest had an increase of 1.4 percent followed by the Northeast with a modest incline of 0.4 from January 2018.
January’s inventory figures are up from last month 3.9 percent to 1.59 million homes for sale. Compared with January of 2018, there was a 4.6 percent increase in inventory levels. It will take 3.9 months to move the current level of inventory at the current sales pace. It takes approximately 49 days for a home to go from listing to a contract in the current housing market, up from 42 days a year ago.
From December 2018, the Northeast was the only region to have an incline in sales of 2.9 percent. The West had the biggest decline of 2.9 percent followed by the Midwest with a dip of 2.5 percent. The South had the smallest decline of 1.0 percent.
All four regions showed declines in sales from a year ago. The West had the biggest drop in sales of 13.8 percent. The South had a decline of 8.4 percent followed by the Midwest with a drop of 7.9 percent. The Northeast had the smallest drop in sales of 1.4 percent. The South led all regions in percentage of national sales, accounting for 42.1 percent of the total, while the Northeast had the smallest share at 14.2 percent.
In January, single-family sales were down 1.8 percent and condominiums sales were down 3.6 percent compared to last month. Single-family home sales fell 8.4 percent and condominium sales were down 9.5 compared to a year ago. Single-family homes had an increase in price up 3.1 percent at $249,400 and condominiums modestly rose 0.1 percent at $233,000 from January 2018.
Homebuying activity was essentially unchanged in January 2019 compared to one year ago, according to NAR’s January 2019 REALTORS® Confidence Index Survey. The REALTORS® Buyer Traffic Index registered 52 in January 2019, just slightly above 50, a level that indicates no change in the overall direction of buyer traffic activity, One year ago, the REALTORS® Buyer Traffic Index was at 69, a level that indicates homebuying traffic was broadly stronger compared to conditions one year ago. A lower index in one month compared to the level in another month slower activity during that former month, so the steep decline in the value of the index from 69 to 52 indicates homebuying conditions have slowed significantly from conditions one year ago. The REALTORS® Buyer Traffic Index has fallen below leads existing home sales by one to two months, so the January reading is an indicator of sales in the next one to two months.
Buyer traffic was broadly weaker during November and December 2018 and January 2019 compared to conditions one year ago in the District of Columbia and in states 16 states that included Oregon, California, Nebraska, Iowa, Illinois, Maryland, Connecticut, Rhode Island, and New Hampshire. However, buyer traffic conditions were broadly stronger during November and December 2018 and January 2019 compared to conditions one year ago in Idaho, Utah, Wisconsin, Indiana, Alabama, Georgia, South Carolina and North Carolina.
The REALTORS® Buyer Traffic Index has hovered at near 50 since August 2018 when the index fell to 51 and remained at below 50 through December 2018. The January reading of 52 indicates a slight upturn in homebuyer traffic as mortgage rates started falling in January 2019. As of the week of February 14, the average 30-year fixed mortgage rate fell to 4.37 percent, from a high of 4.94 in the weeks of November 8 and 15.
Higher mortgage rates compared to one year ago, the negative effect on confidence of the government shutdown, the cap on deductions for property, state, and local income taxes, and the very cold weather were some factors cited by the respondents for the slowdown in buyer activity in their markets.
Respondents from some Midwest states— Ohio, Illinois, Iowa, Michigan, Missouri, Indiana— reported that the extremely cold weather held homebuying activity.
Some respondents from California, New York, and New Jersey reported the cap on deductions for property, state and local income taxes is negatively affecting sales.
A respondent from California also noted that the widespread wildfires in 2018 are still impacting home sales.
Respondents from Alabama, California, Nevada, Florida, Texas, and Virginia reported that the government shutdown appeared to have had an impact in homebuying activity.
Lack of supply, especially of affordable homes, continues to frustrate would-be homebuyers.
REALTORS® reported that higher mortgage rates (during October, November and December) discouraged buyers
To note, mortgage rates have started falling again since January 2019. As of February 14, the 30-year fixed rate mortgage has fallen to 4.37 percent from 4.8 percent during the weeks of November 8 and 15. The 30-year fixed mortgage rate is still slightly higher compared to the 3.95 percent in January 2018. The monthly increase in mortgage payment arising from a 0.5 percent increase in mortgage rates on a loan of $250,000 is about $73 per month.
In a monthly survey of REALTORS®, NAR asks respondents “Compared to the same month (January) last year, how would you rate the past month’s traffic in neighborhood(s) or area(s) where you make most of your sales?” NAR compiles the responses into an index, where an index above 50 indicates that more respondents reported “stronger” traffic than “weaker” traffic. In generating the buyer traffic index at the state level, NAR uses data for the last three surveys to have close to 30 observations. Small states such as AK, ND, SD, MT, VT, WY, WV, DE, and D.C., may have fewer than 30 observations. The index is not seasonally adjusted, so a year-over-year comparison is appropriate.
 The index is not seasonally adjusted, so a year-over-year comparison is appropriate compared to a month-to-month comparison in evaluating whether market conditions are improving or deteriorating.
 Freddie Mac’s survey of 30-year fixed rate mortgages
Bloomberg reported that 876,000 acres were burned in California due to wildfires, citing data form the California Department of Forestry and Fire and Protection in Now California Wildfires Burn All Year; see https://www.bloomberg.com/news/articles/2019-01-17/california-fires-burn-all-year-as-drought-left-state-a-tinderbox
 Rates started falling after Chairman Powell of the Federal Reserve Board announced in December 2018 that it was looking at one rate hike in 2019.
Using data from the 2018 Profile of Home Buyers and Sellers we can break down household composition, and the relationship it has to home purchasing choices.
Among all recent home buyers, 63 percent were married couples, 18 percent were single females, nine percent were single males, and eight percent were unmarried couples.
Four percent of recent buyers identified as gay or lesbian, and one percent identified as bisexual.
Among first-time buyers, 54 percent were married couples, and 67 percent of repeat buyers were married couples.
Among first-time buyers, 16 percent were unmarried couples, and five percent of repeat buyers were married couples.
Among all home buyers, 82 percent purchased a detached single-family home, eight percent purchased a townhouse/row house, four percent purchased an apartment or condo.
Eighty-seven percent of married couples, and 83 percent of unmarried couples purchased a detached single-family home.
Married couples were typically 45 years old with a household income of $106,300. They typically purchased a home that was a median of 2,070 sq. ft., for $289,000.
Unmarried couples were typically 34 years old with a household income of $88,800. They typically purchased a home that was a median of 1,630 sq. ft., for $219,000.
Single females were typically 54 years old with a household income of $61,400. They typically purchased a home that was a median of 1,550 sq. ft., for $189,000.
Single males were typically 52 years old with a household income of $73,200. They typically purchased homes that were a median of 1,590 sq. ft., for $215,000.
Fifteen percent of all buyers were influenced to choose their neighborhood based on the convenience to a vet or outdoor space for their pet. 20 percent of unmarried couples chose their neighborhood based on the convenience to a vet or outdoor space for their pet.