You left school with a solid understanding of the Pythagorean theorem, and you could probably recite a row or two of the Periodic Table of Elements in your sleep. But one thing you likely didn’t pick up in class? A personal finance lesson centered on home buying and the importance of credit.
Ready to go back to school and learn a few important home buying principles? Here to help are mortgage brokers and finance experts who helped us create a “Home Buying 101” quiz to test your knowledge. Are you up for the challenge? Pull out your No. 2 pencils (or, actually just scroll through).
Q1: True or false?
When you’re getting ready to buy a house, it’s a good idea to open up a store credit card to help build your credit.
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“Don’t apply for new credit or let anyone run your credit, even if you are pre-approved or your loan has already received a fully-underwritten loan approval,” says Larry Locke, a mortgage broker and owner of Pro-Funders, Inc, in Murrieta, California. Applying for loans can put dents in your credit, which you want in tip-top shape when you are getting serious about home buying.
Q2: How much down payment do you need to buy a home?
B. 3 percent of the purchase price
C. 3.5 percent of the purchase price
D. Any of the above
(Image credit: Kristin Duvall/Stocksy)
A: The correct answer is D.
VA loans require $0 down, qualified first-time homebuyers can put down as little as 3 percent for a conventional loan, and FHA only requires a 3.5 percent down payment, says Elysia Stobbe, a mortgage and real estate expert and author of “How to Get Approved For The Best Mortgage Without Sticking a Fork in Your Eye.”
Q3: True or false?
A home inspection is required when using a loan to purchase a home.
A home inspection is not required when using a loan to purchase a home, but it is strongly encouraged, says Stobbe.
Q4: Payment history (a.k.a. how well you stay on top of your credit accounts) makes up what percentage of your FICO score?
A. 10 percent
B. 25 percent
C. 35 percent
D. 50 percent
(Image credit: Yulia Grigoryeva/Shutterstock)
A: The correct answer is C.
When it comes to your credit score, payment history is one of the most important factors impacting your score. It shows creditors your ability to keep accounts in good standing.
Q5: True or false?
To impress lenders, you should pay off one of your credit cards and close it out while you’re going through the mortgage approval process.
(Image credit: BONNINSTUDIO/Stocksy)
Credit history makes up 15 percent of your credit score, according to FICO, a popular credit-scoring system. Making regular payments on a credit card that you’ve had for years and keeping the balance under 30 percent of your available credit will help you maintain a healthy credit score while you’re in the market for a house.
“The longer you own and use the card, the more it helps to maintain a good score,” says Richard Barenblatt, mortgage specialist at Guardhill Financial, in New York City
Q6: True or false?
A pre-approval is stronger than a pre-qualification.
(Image credit: MoMo Productions/Getty Images)
A pre-qualification is the first step in home-buying. Typically, you self-report your income and credit score to your lender. A pre-approval happens once you provide pay stubs, tax returns, and other documentation to verify the information. Both are important steps.
“Buyers need to know how much they qualify for and what their estimated monthly payment will be,” says mortgage banker Ralph DiBugnara, president of Home Qualified and vice president of Residential Home Funding. “Nothing is worse than finding your dream home only to discover it’s out of your price range.”
Q7: Which of the following does not impact your credit score?
A. Overdrafting your checking account
B. Maxing out your credit card
C. Missing a credit card payment
D. Applying for several store credit cards
A: The correct answer is A.
But we’ll admit this one is a bit of a trick question. While overdrafting your checking account may cost you a fee, it won’t necessarily ding your credit score — yet. (An exception could be if you never paid the bank back and the account went to collections). However, FICO in 2019 will be testing a new scoring system that will allow consumers to grant the agency access to their bank account information. Paying bills, not overdrafting your account, and keeping a few hundred bucks in your checking will help boost your scores if you opt in. On the contrary, not doing those things could hurt your score.
Q8: Which credit score will help you get the best rate on a home loan?
E. Both C & D are correct
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A: The correct answer is E.
That’s right. While an 810 score is brag-worthy, when it comes to mortgages, 760 is “excellent enough” in the eyes of lenders. You’ll snag the same rate with a 760 score as you would an 810 score.
“For home financing purposes, the short answer is no; there are no advantages to getting your credit score into the 800 range,” says Robert E. Tait, a senior loan officer with Allied Mortgage Group in Jamison, Pennsylvania. But, Tait says, it’s a good idea to get your score higher than 760 so you can provide a buffer in case you forget to pay a bill or an emergency happens and your credit drops.
Q9: Credit mix makes up what percent of your FICO credit score?
A. 5 percent
B. 10 percent
C. 15 percent
D. It is not a factor
A: The answer is B.
Your FICO score will consider your mix of credit accounts when factoring your score. This could include installment accounts, like auto loans and student loans, as well as revolving accounts like credit cards and retail accounts.
Did you do great or learn a few things? If so, you’re deserving of a report card to hang on the fridge of your new home
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