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The importance of credit scores

Americans with near-perfect credit scores are reaping the rewards of record-low mortgage rates, a trend that underscores the economic divide created by the coronavirus recession.

The typical credit score for mortgage borrowers rose to 788 in the first quarter, a record high, the Federal Reserve Bank of New York said in a quarterly report. That’s the highest level in at least two decades. During the era of loose lending that led to the Great Recession, the median credit score of mortgage borrowers fell as low as 707.

Meanwhile, only a quarter of borrowers who landed home loans during the January-through-March period had credit scores of less than 742. Just 10 percent had credit scores below 688, according to the New York Fed’s data.

The numbers have been skewed upward in part by the large share of mortgage refinancings in 2020 and 2021. People who already own homes generally have higher credit scores than first-time buyers.

What’s more, mortgage lenders grew more risk-averse during the coronavirus pandemic. In the early months of the recession, mortgage brokers described being required to complete near-obsessive verifications of borrowers’ employment and incomes.

A symptom of the K-shaped recovery

Americans’ fortunes have diverged widely during this recession. Those who can work remotely have continued to collect paychecks. Home prices have soared, and stocks have recovered the value they lost earlier in the year.

However, lower-wage workers struggle as restaurants, hotels and other service-sector employers continue to be battered by the pandemic. Economists have invoked the K-shaped recovery to describe the disconnect — affluent Americans’ fortunes are rising like the top half of the letter, while the working classes are experiencing the downward slope of the bottom half of the K.

The highest possible credit score in the FICO system is 850. A score higher than 740 is considered excellent.

“A FICO score is not an indication of wealth,” says radio host and author Chris Hogan, a personal finance expert. “It’s more of an indication of how you’ve dealt with debt.”

Rising scores come with an upside for both lenders and borrowers: A homeowner with a credit score approaching 800 is exceedingly unlikely to default. For borrowers, that means little risk of a financially devastating foreclosure.

“If you sign on to buy a home before you’re ready, it can be more of a curse than a blessing,” Hogan says.

What you can do

Your credit score is the single most important factor in determining your mortgage rate. Here’s how you can boost it — and what to do if your score won’t go any higher:

Pay down credit card debt: If you have a choice between tackling debt or scraping together a larger down payment, it’s wise

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Yesterday, I came across a great article on lending and the importance of credit scores. It was written by Stephan Varteresian, a mortgage broker at Secure Mortgage Corp, in Gardner and Milford, Massachusetts.

Credit scoring is a big mystery to most people. There are numerous questions that encompass the credit score phenomena.

* What is a credit score? Why is it so important?
* Who creates credit scores? How are they calculated?
* Who uses my credit score?
* What can I do to ensure my credit stays in good standing?
* What does a good credit score do for me?

It’s questions like these that prompted me to share some very important and informative information with you. The following will help you understand the important role credit plays in today’s finance world.

Your credit score is a vital part of your credit health. When you’re applying for credit, whether it’s a credit card, an auto loan, a personal loan or a mortgage, lenders will want to evaluate your credit risk level. To understand your credit risk, most lenders will look at your credit score.

Your credit score influences the debt capacity that’s available to you and the terms that lenders will offer you. It’s a vital part of your credit health. Understanding credit-scoring methodology can help you manage your credit health more effectively.

Knowing that potential lenders evaluate your credit risk, you can take a proactive approach to lower your credit risk raising your scores over time. The better your credit score, the broader financial opportunities will be available to you.

More about Stephan:

John, I do all types of financing; residential, commercial, construction/rehab and hard money. I even do mobile home financing. [I send my clients emails] that are designed to highlight programs. Very valuable stuff …

If you want to learn more about Stephan or sign-up for his emails, visit his website.

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Updated:  Boston Real Estate and Boston Condos 2021

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