Over the past year, U.S. millennials have been the nation’s most active demographic in terms of transitioning from renter-majority to owner-majority. Millennials purchase more homes than other generations, with 25-44-year-olds buying roughly 60% of homes sold over the last several years. One of the top destinations for these millennials is the Charlotte, North Carolina, housing market.
Between 2017 and 2022, homeownership among millennials in Charlotte rose by 24%, with a 22% decline in renters, according to RentCafe research reported by the Charlotte Observer. But why are millennials so attracted to Charlotte? Its thriving job market, temperate climate, range of outdoor activities, and surge in finance and healthcare jobs are vital drivers.
If you’re a millennial interested in securing a mortgage and buying a home in Charlotte, your credit score (and credit history) will be an important approval metric. Read on to find out why optimizing your credit score can help you win the approval of Charlotte mortgage lenders.
The Role of Credit in Mortgage Approval
A credit score is a numerical representation, ranging from 300 to 850, designed to assess and predict an individual’s credit risk or behavior. Credit reporting companies use a mathematical formula known as a scoring model (the most common of which is by Fair Isaac and Company, known as a “FICO” Score) to calculate your credit score from information in your credit report. Factors contributing to this score include payment history, credit utilization, length of credit history, types of credit in use, and new credit inquiries.
In terms of borrowing power, a credit score evaluates the likelihood that a person will repay a loan or credit obligations on time (or at all). A higher credit score typically indicates a lower credit risk to potential mortgage lenders, suggesting a history of responsible financial behavior.
For mortgage lenders in Charlotte (and the entire nation), credit scores play a crucial role in the mortgage approval and underwriting process, as it helps them assess the risk associated with lending to a particular borrower. Credit scores help mortgage lenders determine their interest rates, loan amounts, and other lending terms offered to borrowers.
Even a slight variation in your credit score can markedly affect your interest rate and monthly payments. Consider a 7.5% interest rate versus an 8% rate on a $300,000 mortgage with a 20% down payment and a 30-year fixed loan term: At 7.5%, you’d pay around $1,942 monthly before taxes, insurance, and fees versus $2,025 at 8% — a difference of thousands of dollars over a 30-year term.
Therefore, it’s beneficial to understand how various factors impact your credit and learn ways to optimize your credit score for the best possible loan scenario.
Strategies for Boosting Credit Scores
Positive financial habits can help optimize your credit score and ensure favorable approval and loan terms with mortgage lenders in Charlotte. Addressing credit issues early in your homebuying process can help you boost your score before you apply for a mortgage.
Here are some habits that can lead to credit score optimization.
Review Your Credit Reports Regularly
A lower credit score could be due to errors in your credit report. As such, it’s essential to review your credit report for errors, discrepancies, and missing information regularly.
You can order a free copy of your credit report annually from the major credit reporting agencies (CRAs) — Equifax, Experian, and TransUnion; there are various ways to obtain your credit score for free or for a fee. Note that your credit score may vary from one CRA to the next, depending on the scoring model used and the information contained in each version of your credit report. Also, there may be differences between the credit reports available to you as a consumer through the bureaus or other financial websites and those lenders use to determine creditworthiness. But you can still track the accuracy of your history and the trendline of your score through these services.
If you have sufficient grounds to disagree with your credit reports, you can file a dispute with the CRA and the creditor. Identify every item you wish to dispute, and attach supporting documents.
Make Payments on Time
Paying your debts on time and in full is one of the best credit-boosting strategies, as payment history constitutes about 35% of your credit score. To avoid late payments and fees, consider integrating automatic payments into your accounts or setting up alerts reminding you of payment due dates.
Maintain a Low Credit Utilization Ratio
Revolving credit, meaning credit cards and lines of credit, dictate credit utilization rates. These rates do not account for installment loans, such as mortgages or auto loans, which contribute to your credit profile differently.
A low credit utilization rate indicates you’re utilizing less of your available credit and spending within your means. Ideally, maintain a credit utilization rate below 30%, both per credit card and in total across all available credit.
The timing of when credit card companies update your balance information with credit reporting agencies can impact your credit utilization rate and, thus, your credit score. Typically, credit card companies refresh this information every 30 days at the end of your billing cycles. So, if you pay down a debt, it may take a few weeks to see improvements to your credit score.
Have a Mix of Credit Types
Having a mix of credit types suggests to mortgage lenders that you can manage multiple types of credit. Examples include mortgages, installment loans, and revolving credit.
Avoid New Credit Inquiries
Generally, the lower your debts, the better your chances of mortgage approval. Moreover, hard inquiries occur when a creditor checks your credit after you apply for a new line of credit. Frequent occurrences of these hard inquiries can negatively impact your credit score and may create the impression among mortgage lenders that you aspire for more credit than you can reasonably repay.
Consider Debt Consolidation and Credit Counseling
If you’re facing overwhelming debt, you have various options for getting on track financially and improving your mortgage shopping experience. Working with financial and legal advisors can help you determine the best course of action for your circumstances.
Debt Consolidation
Consolidation combines multiple debt balances into one payment, often through balance transfers to a low-interest credit card or a new loan. Consolidation can be beneficial for simplifying payments, reducing interest, and potentially boosting credit scores if it helps you pay off debt faster.
Credit Counseling
Credit counseling services can provide invaluable support if you’re facing mounting debt. These programs, often nonprofits, offer financial expertise and guidance, aiding individuals in creating strategies to manage and retire their debts effectively. Credit counseling may be good to get you back on track financially but may set you back in terms of qualifying for a mortgage. Before entering a credit counseling program, you may want to consult with a mortgage advisor to understand its impact on your homebuying plans.
Debt Relief
Debt relief involves negotiated settlements, reduced payments, or structured plans to manage debt. It can provide an avenue to work with creditors to lessen the overall debt burden but can negatively impact credit scores in the short term. It may also result in a surprise tax bill at the end of the year, as the IRS sometimes views the debt relief windfall as a form of income. Be sure to check with your tax advisor prior to entering into a debt relief arrangement.
Bankruptcy
Bankruptcy may be a last resort after exploring other options. It can have long-lasting effects on credit but also can provide a clean slate following turbulent financial times. Certain mortgage programs require significant waiting periods of bankruptcy, while FHA loans will permit a borrower to qualify even while in a Chapter 13 restructuring bankruptcy repayment period.
Although debt restructuring or management strategies may impact credit scores initially, responsibly managing and reducing debt can ultimately enhance creditworthiness. At TruLoan Mortgage, our advisors can work with you to carve out a path to homeownership despite financial challenges. We have programs to help you obtain a mortgage, regardless of your situation, and we would be happy to sit down with you to discuss your options. Check out our Mortgage Info Videos and Mortgage Myths Busted pages for more information, or contact us to learn more.
Keep an Eye on the Mortgage Market
We all saw how the pandemic crumbled economic activities in the United States and around the world. Given the external influences that can impact the property market, it’s crucial to stay informed about current mortgage rates in Charlotte, trends, and other local market conditions.
You need not go it alone. Finding the right Charlotte mortgage lender can help you navigate the complex waters of mortgage lending, approval, and homeownership in Charlotte. Whether you are a millennial moving from another state or a Charlotte native, having a knowledgeable local lender at your disposal can make a huge difference in actualizing your dream of becoming a homeowner in one of America’s most popular destinations for millennials.
The more qualified and experienced the lender is, the greater the likelihood you’ll get high-quality insights into Charlotte’s unique real estate market. A reputable mortgage lender like TruLoan Mortgage can offer sound advice and personal finance tips to improve your credit score and find the right mortgage product.
Planning Is Key: Be Proactive to Secure a Mortgage
To secure mortgage approval and favorable loan terms in Charlotte, it’s vital to prioritize good credit as part of your financial planning. Taking a proactive approach and integrating credit-boosting and positive financial practices into your daily routine is crucial.
At TruLoan Mortgage, we are dedicated to reimagining the home financing experience in Charlotte and helping you create a clear mortgage plan that will make you a proud Charlotte homeowner. Specializing in residential mortgage finance, our team of seasoned mortgage professionals blends outstanding service with cutting-edge technology to ensure your lending journey is exceptional.
Reach out to TruLoan Mortgage to discuss home financing options in Charlotte.