Growing up in my family’s mortgage business here in the Portland-Vancouver area, I was taught that it’s not a matter of if someone can achieve the goal of owning a home but only a matter of when.
I also learned that credit scoring is perhaps the number one thing standing in the way of someone achieving that goal. Sometimes, it’s as simple as paying down a high-credit utilization credit card or disputing an incorrect late payment on a credit report that will make or break someone’s ability to qualify for a mortgage.
My ability to educate and help my clients with understanding what their credit score means, and advise them on how to raise their credit score can go a long way in helping secure better home loans for their families. Better credit scoring can secure better mortgage rates and sometimes minor tweaks can help people qualify for products and rates that might otherwise seem unavailable.
The small amount of time I can spend educating and instructing people on what to do to raise their credit scores can produce a change that will create a lifetime of difference and thousands of dollars in savings on the life of a mortgage. Taking that time to help my clients is one of the most important things I do when I work with a family on their home loan.
My latest blog post covers the basics of credit scoring and easy to implement tips for a better credit score:
According to data from the various credit reporting agencies, the average credit score in the United States hovers around 695. Though each credit reporting agency utilizes different scoring models to calculate credit score they all place the average American’s credit score somewhere between 660 and 720. In Oregon, the average credit score is 682.
Your credit score will impact your mortgage rate
For all lenders, including mortgage professionals, your credit score is used to measure how viable your particular loan application is in terms of how likely you are to make good on and pay back the loan over its lifetime. Having no credit history (also referred to as being a ‘credit invisible’) or holding a very low credit score (being high-risk) can lead to a lender not being able to offer a mortgage loan at all.
Depending on where your credit score falls within the range (300 to 830 or 850 depending on the credit reporting agency) will also impact the lending terms you’re offered – in particular, your interest rate. The higher your credit score, the lower your APR (annual percentage rate) will be.
Credit score is usually classified as follows:
- 720-750 – 830/850: Excellent Credit
- 660 – 719: Average/Fair Credit
- 620 – 659: Poor Credit
- 600-620 or lower: Bad Credit
According to Credit Sesame, “the minimum score [needed to qualify for a mortgage loan] also depends on the type of loan you’re applying for. With a conventional loan for a house that’s backed by Fannie Mae or Freddie Mac, for example, the minimum score required is set at 620. But the lowest credit score to buy a house with an FHA loan is 580.” With all of this in mind, in order to get a great rate and save thousands on the cost of your mortgage loan, it’s best to go into the transaction with the highest credit score possible.
If you knew that spending the next 6 months working on your credit score could save you interest over the life of your loan and keep more dollars in your pocket, wouldn’t you do everything you could to boost your credit? If credit your score is relatively low, or even if you just want to give your credit score a boost in preparation for your home purchase, here are Do’s and Don’ts to help you work toward a higher credit score and a relatively better mortgage rate:
Get a copy of your credit report
You are legally entitled to one free credit report from each of the three major credit reporting agencies once each year (Equifax, Experian, and TransUnion). Contact the agencies directly to obtain your report(s).
From the FTC website: “The three nationwide credit reporting companies have set up one website, toll-free telephone number, and mailing address through which you can order your free annual report. To order, visit annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form.”
You can also search Google for ‘free credit report’ to access any number of other options, like Credit Karma or Credit Sesame, to obtain a free copy of your credit report. These companies even have a free app that sends alerts if your credit score changes or there is a change in the data on your credit profile. It’s important to note that while this data might be a good indication of credit scoring, the numbers provided by these services can vary by 30-50 points from the actual credit bureau scores.
Note, many of the bigger credit card companies offer basic free credit score monitoring and notification of a shift in your credit score. Check your account benefits to see if you already have access to this feature. It’s an easy way to get a good estimate of your current credit score.
Check your credit report(s) for errors
A recent report from the Federal Trade Commission exposed approximately one-fourth of the reports examined by the commission held at least one error.
If you find errors, file a dispute with the credit agencies. The FTC advises the following action if you do find an error on your credit report and even offers a link to sample dispute letter:
“Tell the credit reporting company, in writing, what information you think is inaccurate. Use our sample dispute letter. Include copies (NOT originals) of documents that support your position.”
A full write-up of the steps to disputing an error on your credit report and following up to ensure the error is addressed is also provided at the FTC website.
Bear in mind, most mortgage lenders will require credit disputes to be resolved before awarding a loan, and the dispute process can, unfortunately, take months. If you do have issues on your credit report that you wish to dispute and you’re preparing to apply for a mortgage, either start the dispute process early or wait until after you’ve secured the loan. If you’re uncertain which route makes the most sense, talk to a qualified mortgage professional.
While you’re investigating your credit score and your recorded credit history, keep the following things in mind:
Pay your bills on time
Paying bills late or not at all may seem like an obvious negative when it comes to your credit score, but did you know that even one late payment can lower your credit score – even if you already have excellent credit.
According to FICO data, a 30-day delinquency could cause as much as a 90- to 110-point drop on a FICO Score of 780 for a consumer who has never missed a payment on any credit account.
Obviously, paying your credit cards in full and on time is critical to a good credit score – issues like charge offs, debt collections and bankruptcy will absolutely impact a mortgage loan rate, if not prevent acquiring the mortgage altogether. Actually, late payments on any bills: utilities, rent, phone and other loans can have a negative impact too.
Keep an eye on credit card balances
Maintaining high credit card balances or maxing out credit cards is another issue that will negatively impact your credit score, making your mortgage more expensive.
You want to aim for under 20% credit utilization overall, and about the same on any one card for optimum. If you’re using more than 20% of your credit, be strategic about paying balances down before applying for a home loan. According to FICO, “[Credit utilization] below 10 percent is better, and people who have the highest credit scores average just 7 percent credit utilization.”
Don’t close old credit accounts
It may seem counterintuitive, but don’t look to close any cards in the near future if you’re looking for a mortgage. Closing a credit card with a balance actually tips you away from ideal credit utilization because closing the card lowers the available credit on the account to $0 while you’re still holding a balance.
Closing any credit cards, even if they carry a low balance, can have a negative impact because this action lowers your overall available credit, thereby skewing your credit utilization higher.
If you absolutely must close a card, try to pay it off first. And bear in mind that closing a credit account can negatively impact your score, especially if you’ve held the account for a long time. 15% of your credit score is the length of your credit history. Closing a card you’ve had for a long time will drag your score down.
Don’t open new credit accounts
While it would seem that more cards equating to a higher overall available credit amount would be a good thing for your overall credit score, opening a bunch of new cards is going to take a hit on your credit score. The very act of pinging your credit report for the purpose of opening a new credit account can impact your credit score, and opening multiple new cards all at once drags the average length of your credit history down.
If you’d like to discuss how your current credit score could impact your future mortgage loan and get the information you need to put a plan in place so you come into your new home purchase in the best shape possible, please get in touch.