Today is Black Friday. Between now and Christmas, you will be offered a discount on most every purchase, if you will just apply for the company’s credit card. Although saving $10, $50, or $100 seems like a great idea, it could prove to be a terrible mistake if you are planning to purchase a home in the next few months.
Imagine, you are making a $100 purchase and the clerk offers you a 20% or $20 discount on your entire purchase. All you have to do is apply for their credit card. If you decline, you are told that you do not have to actually open the account, you just need to complete the application. You will still receive the discount. How can you turn down the savings? I’ve done it. The problem is, each inquiry will lower your score 2-5 points. Imagine doing this 5-10 times between now and Christmas.
If you actually get the card, you will incur a “new account” penalty. This penalty can be as much as 5% (Upwards of 45 points) of your FICO Score. Also, the new card can reduce the “length of your credit” by as much as 50%. “Length of credit” accounts for 15% of your total credit score.
Knowing that opening these accounts can easily lower your FICO score 10-50 points or more, lets look at what 1 point can mean when purchasing a home. The worst case is you may not qualify! If you have marginal credit, just 1 point can be the difference in you being able to purchase a home.
This also applies to those with good or even excellent credit. I have seen client’s scores drop from above 720 to below 680 due to credit card usage. Imagine you want to purchase a home for $200,000 and plan on putting 5% down; the difference in payment between a 680 credit score and a 679 credit score would be in excess of $100 a month.
This illustration compares FHA 3.5% down loans based on a Conventional 95% Loan. I’ve compared a FHA loan is based on a 679 decision credit score with the same loan with a 680 score. I then compared both loans to a conventional loan with a 680 decision score.
Having a 680 score results in a $14 a month savings if you couldn’t put down the extra 1.5% necessary for the conventional loan but if you were able to go Conventional, your savings jumps to up to $64 a month. I’m guessing this is more than you saved on your holiday purchase with your new credit card.
After 5 years, the 680 FHA loan saved you $1,233, but the 680 Conventional loan saved you $5.247. This is huge but it only gets better.
If you were to stay in your home and keep your mortgage for 15 years,and went with the FHA program, your savings would be over $3,500, but here is the real eye opener. Had you gone with the 95% conventional loan with the same 680 credit score, your savings would be in excess of $14,000.
We have some wonderful first-time buyer programs for making home ownership possible. Owning your own home is the best Christmas gift you could give yourself. Please call me @ 775-828-7006 to discuss your mortgage questions and needs. Oh, and when you are doing your holiday shopping and are offered that credit card, JUST SAY NO!