From the time of year to the neighborhood, a lot of factors come into play when you’re selling a home. But here’s one variable you might not have considered — color.
During open houses and online searches, the colors of your home are constantly working for or against you. That’s according to Zillow, a real estate and rental marketplace, which examined over 32,000 photos from sold homes around the country to see how certain paint colors impacted their average sale price compared to homes of similar value with white walls. Here’s what they found.
A Change of Trends
The colors that added value to your home just a year ago can now be hurting its sale price. In 2016, painting your kitchen a shade of yellow could help your home sell for $1,100 to $1,300 more. However, this year, a yellow kitchen could lower your home’s value by an estimated $820, according to Zillow.
Some color preferences remained consistent, with terracotta walls still devaluing a home. Just last year, homes with terracotta walls sold for $793 less than Zillow’s predicted selling price. This year, that number more than doubled, with homes with terracotta walls selling for $2,031 less.
The takeaway: If you’re looking to sell your home, you may want to avoid a terracotta shade. Also be cautious in general when choosing dark and bold colors.
Keep it Light
“Painting walls in fresh, natural-looking colors, particularly in shades of blue and pale gray, not only make a home feel larger but also are neutral enough to help future buyers envision themselves living in the space,” said Svenja Gudell, Zillow’s chief economist, in a statement.
In fact, homes with blue bathrooms, including lighter shades of blue or periwinkle, sold for $5,440 more than expected, Zillow found. Kitchens with light blue-gray walls sold for $1,809 more than expected, and walls with cool, natural tones like soft oatmeal and pale gray also had top-performing listings.
Light, simple walls performed best among sellers, however, walls with no color had the most negative impact on sales price. Homes with white bathrooms or no paint color, for instance, sold for an average of $4,035 less than similar homes, Zillow noted.
As if it isn’t stressful enough worrying about your rooms’ colors, your home’s exterior color can also impact its sale price.
To that end, buyers typically enjoyed a pop of color, with homes featuring dark navy blue or slate gray front doors selling for $1,514 more. Buyers also responded positively to trendy mixes of light gray and beige, or “greige,” exteriors versus basic tan stucco and medium-brown shades.
If you’re trying to sell your home, a can of paint can be a wise investment — so long as you choose the right color. Keep these findings in mind before you head to the paint store. Likewise, just as color impacts sale price, know that selling your home can impact your credit. Don’t forget to check your credit report card before you start picking out paint chips.
Student loan debt is a reality for many people wishing to buy homes. Fortunately, it does not have to be a deal-breaker. But there’s no getting around the fact that a large amount of student loan debt will certainly influence how much financing a lender will be willing to offer you.
In the past, mortgage lenders were able to give people with student loans a bit of a break by disregarding the monthly payment from a student loan if that loan was to be deferred for at least one year after closing on the home purchase. But that all changed in 2015 when the Federal Housing Authority, Fannie Mae, and Freddie Mac began requiring lenders to factor student debt payments into the equation, regardless of whether the loans were in forbearance or deferment. Today by law, mortgage lenders across the country must consider a prospective homebuyer’s student loan obligations when calculating their ability to repay their mortgage.
The reason for the regulation change is simple: with a $1.3 million student loan crisis on our hands, there is concern homebuyers with student loans will have trouble making either their mortgage payments, student loan payments, or both once the student loans become due.
So, how are student loans factored into a homebuyer’s mortgage application?
Anytime you apply for a mortgage loan, the lender must calculate your all-important debt-to-income ratio. This is the ratio of your total monthly debt payments versus your total monthly income.
In most cases, mortgage lenders now must include 1% of your total student loan balance reflected on the applicant’s credit report as part of your monthly debt obligation.
Here is an example:
Let’s say you have outstanding student loans totaling $40,000.
The lender will take 1% of that total to calculate your estimated monthly student loan payment. In this case, that number would be $400.
That $400 loan payment has to be included as part of the mortgage applicant’s monthly debt expenses, even if the loan is deferred or in forbearance.
Are Student Loans a Mortgage Deal Breaker? Not Always.
If you are applying for a “conventional” mortgage, you must meet the lending standards published by Fannie Mae or Freddie Mac. What Fannie and Freddie say goes because these are the two government-backed companies that make it possible for thousands of banks and mortgage lenders to offer home financing.
In order for these banks and mortgage lenders to get their hands on Fannie and Freddie funding for their mortgage loans, they have to adhere to Fannie and Freddie’s rules when it comes to vetting mortgage loan applicants. And that means making sure borrowers have a reasonable ability to repay the loans that they are offered.
To find out how much borrowers can afford, Fannie and Freddie require that a borrower’s monthly housing expenses (that includes the new mortgage, property taxes, and any applicable mortgage insurance) to be no more than 43% of their gross monthly income.
On top of that, they will also look at other debt reported on your credit report, such as credit cards, car loans, and, yes, those student loans. You cannot go over 49% of your gross income once you factor in all of your monthly debt obligations.
For example, if you earn $5,000 per month, your monthly housing expense cannot go above $2,150 per month (that’s 43% of $5,000). And your total monthly expenses can’t go above $2,450/month (that’s 49% of $5,000). Let’s put together a hypothetical scenario:
Total monthly housing expenses AND debt payments = $2,950
$2,950/$5,000 = 59%
So what do you think? Does this applicant appear to qualify for that mortgage?
At first glance, yes! The housing expense is at or below the 43% limit, right?
However, once you factor in the rest of this person’s debt obligations, it jumps to 59% of the income — way above the threshold. And these other monthly obligations are not beyond the norm of a typical household.
What Can I Do to Qualify for a Mortgage Loan If I Have Student Debt?
So what can this person do to qualify? If they want to get that $325,000 mortgage, the key will be lowering their monthly debt obligations by at least $500. That would put them under the 49% debt-to-income threshold they would need to qualify. But that’s easier said than done.
Option 1: You can purchase a lower priced home.
This borrower could simply take the loan they can qualify for and find a home in their price range. In some higher priced real estate markets it may be simply impossible to find a home in a lower price range. To see how much mortgage you could qualify for, try out MagnifyMoney’s home affordability calculator.
Option 2: Try to refinance your student loans to get a lower monthly payment.
Let’s say you have a federal student loan in which the balance is $30,000 at a rate of 7.5% assuming a 10-year payback. The total monthly payment would be $356 per month. What if you refinanced the same student loan, dropped the rate to 6%, and extended the term to 20 years? The new monthly payment would drop to $214.93 per month. That’s a $142 dollar per month savings.
You could potentially look at student loan refinance options that would allow you to reduce your loan rate or extend the repayment period. If you have a credit score over 740, the savings can be even higher because you may qualify for a lower rate refi loan. Companies like SoFi, Purefy, and LendKey offer the best rates for student loans, and MagnifyMoney has a full list of great student loan refi companies.
There are, of course, pros and cons when it comes to refinancing student loans. If you have federal loan debt and you refinance with a private lender, you’re losing all the federal repayment protections that come with federal student loans. On the other hand, your options to refinance to a lower rate by consolidating federal loans aren’t that great. Student debt consolidation loan rates are rarely much better, as they are simply an average of your existing loan rates.
Option 3: Move aggressively to eliminate your credit card and auto loan debt.
To pay down credit debt, consider a balance transfer. Many credit card issuers offer 0% introductory balance transfers. This means they will charge you 0% interest for an advertised period of time (up to 18 months) on any balances you transfer from other credit cards. That buys you additional time to pay down your principal debt without interest accumulating the whole time and dragging you down.
Apply for one or two of these credit cards simultaneously. If approved for a balance transfer, transfer the balance of your highest rate card immediately. Then commit to paying it off. Make the minimum payments on the other cards in the meantime. Focus on paying off one credit card at a time. You will pay a fee of 3% in some cases on the total balance of the transfer. But the cost can be well worth it if the strategy is executed properly.
Third, if the car note is a finance and not a lease, there’s a mortgage lending “loophole” you can take advantage of. A mortgage lender is allowed to omit any installment loan that has less than 10 payments remaining. A car is an installment loan. So if your car loan has less than 10 payments left, the mortgage lender will remove these from your monthly obligations. In our hypothetical case above, that will give this applicant an additional $200 per month of purchasing power. Maybe you can reallocate the funds from the down payment and put it toward reducing the car note.
If the car is a lease, you can ask mom or dad to refinance the lease out of your name.
Option 4: Ask your parents to co-sign on your mortgage loan.
Some might not like this idea, but you can ask mom or dad to co-sign for you on the purchase of the house. But there are a few things you want to make sure of before moving forward with this scenario.
For one, do your parents intend to purchase their own home in the near future? If so, make sure you speak with a mortgage lender prior to moving forward with this idea to make sure they would still qualify for both home purchases. Another detail to keep in mind is that the only way to get your parents off the loan would be to refinance that mortgage. There will be costs associated with the refinance of a few thousand dollars, so budget accordingly.
With one or a combination of these theories there is no doubt you will be able to reduce the monthly expenses to be able to qualify for a mortgage and buy a home.
The best piece of advice when planning to buy a home is to start preparing for the process at least a year ahead of time. Fail to plan, plan to fail. Don’t be afraid to allow a mortgage lender to run your credit and do a thorough mortgage analysis.
The only way a mortgage lender can give you factual advice on what you need to do to qualify is to run your credit. Most applicants don’t want their credit run because they fear the inquiry will make their credit score drop. In many cases, the score does not drop at all. In fact, credit inquiries account for only 10% of your overall credit score.
In the unlikely event your credit score drops a few points, it’s a worthy exchange. You have a year to make those points go up. You also have a year to make the adjustments necessary to make your purchase process a smooth one. Do keep in mind that it is best to shop for mortgage lenders and perform credit inquiries within a week of each other.
You should also compare rates on the same day if at all possible. Mortgage rates are driven by the 10-year treasury note traded on Wall Street. It goes up and down with the markets, and we’ve all seen some pretty dramatic swings in the markets from time to time. The only way to make an “apples-to-apples” comparison is to compare rates from each lender on the same day. Always request an itemization of the fees to go along with the rate quote.
Once you’ve decided it’s time to buy your own home, saving for that 20% down payment is step one toward doing it. Instead of waiting years, here are six ways to help you save up for that down payment in a matter of months.
1. Explore the Market
If you are saving money to buy your dream home, consider taking a detour through a lower-priced neighborhood first. Buying a lower-cost home means you won’t have to save as long for the down payment. As the home’s value goes up, you can use the equity you’ve built to help you get into a higher-priced home later on, particularly if you find a fixer-upper and you’re good at repairs.
2. Keep Your Priorities in Focus
While it may be tempting to put off other priorities when trying to save for an important goal, Kevin Gallegos, vice president of Phoenix operations at Freedom Financial Network, says paying the rent should always be your first priority. Next, Gallegos says, pay down credit card debt.
“Few, if any, investments will return as much,” he explains. Additionally, having more available credit on your card will improve your debt-to-income ratio and creates a financial cushion that you may need for unexpected costs after moving in to your new home.
3. Automate Your Savings
You can create a budget based on your current expenses to determine how much you can save each month. Once you have determined how much you can afford to save, automatically transfer that amount from your checking account to a savings account.
“Save before you ever have the money in your hand,” Gallegos says. “Record this expense like a bill every month.”
4. Generate More Income
To raise money quickly, Gallegos says it pays off to turn your spare time into money-making opportunities. Look around your apartment for unneeded items to sell online or have a yard sale.
“Even small proceeds can accumulate surprisingly quickly,” he says. “Maybe you have skills where you can turn a hobby into a part-time, money-making enterprise. Babysit, tutor, do yard work or other part-time work.”
5. Track Your Daily Expenses
Before pulling out your wallet, ask yourself how badly you need to buy something. For example, if there is free coffee at work, do you really need to go to the coffee shop every morning? Gallegos admits it sounds cliché to ask such questions, “yet this is just the type of disciplined act that will get someone on track to saving as much as possible as quickly as possible,” he says.
To further reduce daily spending, Gallegos recommends paying with cash instead of using a debit or credit card. “Many studies report that people spend up to 15 to 20% less when paying with cash,” he says.
6. Reduce Household Expenses
There are many ways to reduce monthly expenses at home that can help build your savings for a down payment more quickly. Washing clothes in cold water saves up to 90% of the energy expended in the washing cycle, notes Gallegos. Switching to cold water will directly reduce next month’s utility bill. Plus, speaking of laundry, skip the dryer. That’ll eliminate carbon emissions and help you bank away extra dollars, he adds.
You should also eliminate drafts in your home and turn the hot water temperature down to 120 degrees, which will save you money. Per EnergyStar.gov, a house’s water heater “can waste anywhere from $36 to $61 annually in standby heat losses and more than $400 in demand losses.”
Implementing only one of these ideas may not increase your savings significantly, but if you try a few of them, it can make a real difference to your savings account after a few months and get you on the right track to having enough for your new home.
[Editor’s Note: A good credit score can make buying a new home more affordable, too, since it’ll help you qualify for a low interest rate. You can see where your credit stands by viewing two of your scores for free on Credit.com.]
Have you heard? It’s a seller’s market. Well, in most zip codes at least. But a hopping homebuying season doesn’t necessarily mean your home will go well over asking price just by putting up a For Sale sign. There’s still plenty a seller must do if they want to get the best price for their soon-to-be-former digs.
The reports of a seller’s market are greatly exaggerated — which is to say every zip code is different. If you want to expedite a sale, your “property has to be marketed properly and be priced appropriately,” said Glenn S. Phillips, CEO of Lake Homes Realty. “The feeding frenzy of a few years ago has not returned, and buyers are better informed than ever.”
2. Avoid Over-Pricing
Gradual price drops signal to house hunters that more decreases are to come, Phillips says. Plus, if your home sits on the market long enough, prospective buyers will wonder what’s wrong with it. “In the end, most homes that start overpriced sell at a price lower than a home priced [appropriately] from the start,” he said. “And the deal happens much faster and without the pain of months trying to sell.”
3. Hire a Realtor
Yes, you’ll have to pay them a commission. (Side note: You’ll be expected to cover the buyer’s agent, too.) Still, a good Realtor can be instrumental when it comes to the whole “learn-the-market, price-it-right” stuff. Plus, they’ll do the heavy lifting when showing the house and negotiating offers. Of course, be sure to …
4. Vet Prospective Agents
“Find someone who is in the business full time and who can demonstrate their skill at listing a house,” Reba Haas, CEO of Team Reba at RE/MAX Metro Inc. in Seattle, said. “This will show up in their print materials, online photos, services provided marketing presentation and ability to find the right price range to help you sell in a reasonable amount of time.”
5. Get a Home Estimate …
Yes, your real estate agent can help you set the right price on your home, but it doesn’t hurt to get a general idea of the pricing in your area on your own. There are plenty of sites online that can help you get an idea of your home’s current value.
6. Or, Better Yet, a Pre-Listing Appraisal
That’ll help preclude any problems during the bank appraisal. “An independent appraisal performed prior to listing can determine the value that a lender would assign your home,” Bruce Elliott, president of the Orlando Regional REALTOR Association, said. “While the process is never scientific, many buyers do find an independent appraisal to be a credible source for judging a home’s value.”
7. Determine How Much the Sale Will Cost You
Because there are plenty of expenses associated with selling a home. “A lot of sellers are not aware of what their costs are, including attorney, commission to broker and any other closing costs, including potential repairs before putting the home on the market,” says Kobi Lahav, managing director, Mdrn. Residential, a real estate brokerage in New York City. Fortunately, your broker or listing agent can help you pin down a rough estimate of what you might have to shell out.
8. Hire an Attorney
They’ll be instrumental when it comes time to negotiate the purchase contract with your chosen buyer, but you’ll, of course, want to …
9. Research Their Reputations (& Fees)
Ask friends and family for recommendations, or do a search online to find an affordable real estate attorney you can trust.
10. Ask for a Mortgage Pay Off Quote
You may think you know how much you owe on your mortgage. However, “it is not always what you see on your lender’s website,” Denise Supplee, co-founder of SparkRental and Pennsylvania Realtor, says. “And it is a good idea to have that information, especially if the money from your sale is going towards another sale.”
11. Build Your Coffers
Like we said, selling your home can be very costly. Be sure you’ve got an adequate emergency fund on hand to cover the costs, moving expenses and mortgage or rent associated with your next abode.
12. Check State Tax Records
“Make sure any debts you thought you paid off, were, in fact, posted in municipality tax records [and] satisfied,” Janice B. Leis, Accredited Buyer’s Representative and associate broker with Berkshire Hathaway, says. “Otherwise, you will have an arduous task getting issues resolved if faced with either a quick closing or finding out by the title company near closing, when life is hectic.”
13. Consult an Accountant
Or a trusted financial adviser before putting down For Sale stakes. They can fill you in on any tax deductions or bills associated with the sale that you’ll be expected to pay next year, Leis says.
14. Pull Your Credit Reports
In addition to liens, look for any judgments because those can go against the title of your home. “I have seen … people who thought they were getting X amount of dollars find out that they owe back taxes from many years ago,” Supplee says. (You can pull your free annual credit reports at AnnualCreditReport.com.) If you’re also searching for a new home while you’re trying to sell yours, well, then, you’ll want to …
Beyond that, pay down high credit card balances, limit new credit inquiries and address any other credit-score killers to improve your credit scores. You can monitor your progress using your free credit report summary, along with two free credit scores, updated every 14 days, on Credit.com.
18. Set Realistic Deadlines
“It takes a lot of time to prepare a home for sale,” Haas says. “Be realistic in what you can do, and consider where you may need help from family, friends or by hiring professionals.”
19. Map Out Your Move
“If coinciding with a closing and purchase, make sure there is a contingency in your purchase contract,” Reis says. “Otherwise you owe on two properties or will be in default on new purchase due to lack of proceeds from the sale of your existing home.”
20. Get a Pre-Home Inspection Home Inspection
Sure, it’ll cost you. Still, “spending a few hundred dollars on a thorough home inspection can help you get a better idea of what repairs need to be made, and more importantly, what your net proceeds will be from the sale of your home,” Emile L’Eplattenier, a New York City real estate agent and member of the Real Estate Board of New York, says.
21. Make Any Major Repairs …
Pay particular attention to roof and air conditioning issues, as buyers tend to shy from expensive repairs, Elliott says. “Completing as many repairs as your budget allows will pay off when potential buyers are not put off by the amount of time or money they would need to bring the home up to speed,” he adds.
22. … & Consider Some Small Upgrades
“Replacing old curtains and blinds or even appliances and fixtures will make your home look better in pictures and on showings,” L’Eplattenier says. At the very least …
24. Carefully Consider Major Home Improvement Projects
Fix the roof, sure. Have the AC serviced, but consult with your Realtor or stager before blinging out the bathroom or wallpapering the basement. Certain home improvements that seem like a good idea may not actually bring any value to your home — or, worse, could be a turnoff to potential buyers. (We’re looking at you, outdoor bathtub.)
25. Get Your Disclosures Ready
Though there are variations by city or state, some types of seller’s disclosure are generally mandated by law. “If you know of an issue in your home, write it down on the disclosure form provided by your Realtor,” Elliott says. “Nothing is too small to disclose, and failing to disclose is a serious breach of real estate law that can undermine the sale or worse.”
26. Trim the (Furniture) Fat
“Too much furniture makes a home look smaller than it really is, so sell or move out furniture to make the home feel more spacious,” Phillips says.
27. Tap a Photographer …
And consider hiring a professional. Solid listing photos make a big difference when it comes to getting buyers over to your house.
28. … But Clean Your Windows Before Showings
“Multi-exposure photography … will make the photos really stand out, but if the windows are dirty, you don’t get the best shots,” Haas says. “Plus, cleanliness in general just makes for a better showing.”
29. Actually, Clean Everything
We’re spelling this out just in case you hadn’t taken the initiative to do so already. “Nothing turns buyers off like grime, odor and general dinginess,” Elliott says.
30. Grout & Glaze
“How does the bathroom look?” Max says. “Do you need to reglaze the tub or put new grout on the tile?”
31. Set the Stage
Your Realtor can provide some valuable insights into how to organize your (leftover) furniture. “Stagers can also help you organize your furniture, and they can bring in just a few pieces that accentuate the positives of your home,” Kathryn Bishop, Realtor with Keller Williams Realty in Studio City, California, says.
32. Change the Light Bulbs
Lighting can be just as important as furniture feng shui when it comes to attracting homebuyers.
33. Up Your Curb Appeal
“Neatly trimmed bushes, fresh mulch and a colorful pot of flowers work wonders on that all-important first impression,” Elliott says. “Repainting (or washing) the front door and pressure cleaning the driveway and sidewalks are also simple tasks that provide eye-catching results.”
34. Find a Place for Fido
Sure, Sparky is cute and all, but you’ll want your pets out of the house during any showings. Plus, “it will always bring questions about any pet damage or difficult-to-remove smells,” Phillips says. Speaking of smells …
35. Deodorize …
“Homeowners become smell blind and don’t realize how powerful smell is to homebuyers,” he says. “The home should smell fresh and clean, not perfumed and not like cats, dogs, cigarette smoke, old furniture, mothballs, mold, old food, gym locker or just plain stale.”
36. … De-Personalize …
Pack away those personal pictures and mementos. “Removing these items helps buyers imagine themselves in the home,” Phillips says.
37. … De-Clutter …
That goes beyond offloading some excess furniture and your picture words. Bottom line: It’s time to put all those books, toys, video games and figurines away. “The more crowded the apartment is, the smaller it appears,” Stacey Max, the sales manager of BOND New York, a residential brokerage, says.
38. … & Detach
“Sellers are usually emotionally attached to their homes, which is natural,” Lahav says. “However, they have to remember that any potential buyer is looking at it without the emotional aspect that the owner has for his own property.”
39. Clean Out Your Closets …
“They should look roomy,” Max says.
40. … & Your Drawers
“We all say that one day we will go into all the rooms and drawers and throw out a lot of old items,” Lahav says. “Selling your home is the best time to do it.” In fact, while you’re at it, go ahead and …
41. Start Packing
You’ll have to do it sooner or later. Might as well get a head start.
You don’t have to junk all your belongings — or avoid decluttering just because you don’t want to part with your old Buffy the Vampire Slayer box sets. Consider renting out a storage space or keeping some stuff over at a friend’s or family member’s place while you’re trying to sell.
43. Talk to Your Neighbors
Consider this part of your curb appeal project — especially if you’re selling an apartment, co-op or condo. “You want your neighbors to be aware that there will be open houses,” Lahav says. “Buyers coming to view your home and see unhappy neighbors who look mad that the elevator [doesn’t] work or the driveway is blocked will assume that the neighbors are nasty, and that can affect their decision.”
44. Do a Final Walk-Through
Just to be sure there’s nothing you missed with regard to repairs, curb appeal or staging your home.
45. Advertise Amply
“Some sellers believe that it is OK to not put the home on the local MLS, that the agents in the area will just bring the perfect buyer,” Phillips says. “While this could happen, it rarely does. Doing this is like trying to sell a secret. The price does not matter because few buyers know the house is even for sale.”
46. Host an Open House
“Recently, my listings have all sold to buyers who came to the open houses,” Bishop says. Beyond that …
47. Be Available
“Appointments often come with only an hour’s notice,” she adds. “Work as smoothly as possible with your Realtor to accommodate showings.”
48. Adjust …
If you find you did list your home for more than it’s worth, go ahead and change your listing. (Again, consulting with your Realtor can come in handy here.)
49. … & Stay Flexible
“We’ve seen purchases fall apart over very small amounts of money, over a single appliance and over attitudes,” Phillips says. “Remember the big picture and how much it will cost to start over finding another willing and capable buyer. [Getting] the deal closed is often the best financial (and emotional) choice, even if you have to give up a little more than you wanted.”
If you’ve just bought a new home, chances are you spent quite some time worrying about your credit score. After all, your credit score affects your ability to get a mortgage, and the interest rate you’ll pay on that mortgage.
But what happens to your credit score after you’ve purchased a home? That’s a complicated question with a complicated answer.
Credit Inquiries Cost Some Points
You’ll likely start seeing minor dings in your credit score as soon as you begin applying for mortgages. When you apply for pre-approval, lenders will pull your credit score. When the lenders do perform a hard credit pull, it tells the credit scoring algorithm you’re looking for new credit, which will cause a small drop in your credit score.
You can limit this effect while mortgage shopping by applying for pre-approval with several companies within a two-week period. Some credit scoring models will give you a longer period than this, but keep it to two weeks to be safe. When you limit your mortgage shopping to a short time period, you’ll still get a ding on your credit score, but it will be smaller. (You can view two of your credit scores for free by signing up for an account on Credit.com.)
New Credit Costs Even More
Applying for mortgages will ding your credit a bit, but actually opening a mortgage will cost even more points, especially if this is your first home loanmortgage. The large increase in overall debt will definitely cause a drop in your credit score.
Luckily, installment debts like a mortgage cause less of a score decrease than high-balance revolving debts like credit cards. Still, though, you’ll likely find that your score drops by a few points once the credit bureaus pick up your new mortgage account.
But Adding to Your Credit Mix Is Good
If you’ve never had a mortgage before, adding one to your credit profile can ultimately be a good thing. Approximately 10% of your credit score is made up of your overall credit mix. The more variety, the better!
Once your credit score gets past the temporary ding from the inquiries and taking out a new account, it may actually increase because you’ve expanded your credit mix.
And Making On-Time Payments Is Even Better
Ultimately, if you make your mortgage payments on time, you should see a fairly quick increase in your credit score. In fact, within a few months, barring any other issues, your credit score will likely be higher than it was before you first applied for a mortgage.
When you buy a home, it’s important to be prepared for your credit score to temporarily drop. This happens any time you pick up a new credit account. But once you get past the initial drop, financially responsible homeownership will likely increase your credit score more than ever before.
While rising debt levels are partially responsible for a falling homeownership rate in the U.S., there are ways aspiring homeowners can responsibly take on a mortgage while working on paying down other loan balances. For example, a Credit.com reader recently asked us if there’s a way to get approved for a mortgage, despite having education debt.
“My Equifax report says 10 of my 14 direct service school loans are over the limit. I only started paying two months ago and am on time with full payment. Would consolidating those loans take this problem away? We are trying to buy a house and the lender said this is affecting my credit score.” — Stacy
If by “over the limit” you mean your current loan balances are higher than the amount you originally borrowed, that’s not surprising. Many student loans accrue interest before you enter repayment, and by the time your first bill comes due, the balance will likely exceed the original loan amount. Yes, credit scoring models generally ding you for having high loan balances relative to the original amount borrowed, but taking out a consolidation loan isn’t likely to help much in this area because you’ll have a high balance on that new loan. As for a loan balance affecting your credit score, the best thing you can do is pay it down.
That’s not to say student loan consolidation can’t help you get a home, because it can. Whether or not it’s the right move for you depends on your priorities. Heather McRae, a senior loan officer at Chicago Financial Services, said she encounters this question a lot, particularly when dealing with younger borrowers.
“In mortgage underwriting, one of the biggest factors is your debt-to-income ratio, and that’s specifically on a monthly basis,” McRae said. “If you have the ability to cut [your monthly payment] in half some way or cut it down in any regard, that will help you more easily qualify for a mortgage.”
Is This the Right Option for You?
Student loan consolidation can help you reduce your monthly student loan payments if you extend the loan-repayment term or get a lower interest rate on your loans. (Federal Direct consolidation loans average the interest rates of the loans being consolidated to determine the APR on the new loan, but you might be able to qualify for a lower APR by refinancing with a private lender. Keep in mind that consolidating federal loans with a private loan means you lose some of the repayment flexibility offered through the government.)
Say you have multiple student loans, and each of those loans has a 10-year repayment term, you could consolidate them into a 20-year repayment term and reduce your monthly student loan obligation. You may have more flexibility in your monthly budget, but a longer loan term usually means you’ll end up paying more in the end, unless you qualify for some sort of student loan forgiveness. Even then, you need to consider how much you may end up owing in taxes on forgiven debt.
Figuring out the most cost-effective option can be tricky, but if you’re focused on buying a home in the near future and know your student loans are an obstacle between you and that goal, consolidation may be a viable strategy.
It’s Important to Plan Ahead
One more thing: If you’re thinking of consolidating your student loans to improve your chances of getting a mortgage, give yourself plenty of time to do it.
“It’s not good to do any sort of applying for other loans in the middle of when you’re trying to get a loan,” McRae said. She recommended planning ahead and talking to a mortgage professional if you have questions about how you can improve your chances of getting a home loan. “I talk to people a year or more ahead of time.”
Remember that checking your credit is an important part of financial housekeeping before you apply for any loan, especially when it involves buying a home, because a good credit score can save you a lot of money by way of a good interest rate. You can keep tabs on where you stand by getting two free credit scores, updated every month, on Credit.com.