November 4th, 2015 8:59 AM by Jackie A. Graves, President
Credit is the biggest hot-button topic in mortgage lending by
far. Most would probably agree, any time you can raise
your credit score to improve your mortgage scenario, consider
taking advantage of it. However, every situation is different and here’s
what to be mindful of if
your credit needs a little love.
are three loan types available on the broader mortgage market today, which
includes conventional, FHA, or jumbo. Yes, just three choices. Your credit
score determines these things when it comes time for a loan: program
eligibility, followed by interest and costs.
required middle credit score varies by loan type:
going the easy route and assuming that you need to improve your credit score to
buy a home, talk with an experienced loan professional. The goal is to
determine whether or not you can qualify with the score you have now and, if
yes, does it align with your financial goals. If not, taking action-worthy
steps can be more technical. Typically, clear and specific action must be
followed to improve your credit score. Simply taking the “I’m going to pay my
debts down” approach may not cut it.
Mortgage tip: A
higher credit score can help you secure a more favorable
interest rate, which can keep the payments lower while improving
your borrowing power.
Utilization of credit: The fastest way to
get your credit score higher is to strategically pay off the debts that are
pulling your score down. Simply put, the biggest reason credit scores are low,
independent of late payments, collections, derogatory marks, and little credit
history, is utilization of credit. Utilization of credit is a large component
of your credit score, and using a high percentage of your available credit can
undermine your scores as it signifies you’re overextended on credit. The key is
to not use your full credit line—and ideally at 10% or lower. Or if you must
carry debt, spread it out over multiple accounts. This also should lower the
minimum payments associated with the debt, which can enhance your borrowing
Cost/benefit: A good mortgage company
can cherry-pick which debts you should pay off or eliminate completely.
This is how you quantify how much benefit there is to improving your credit for
better rates and fees.
On-time payments: Paying your bills on time
is a surefire way to help your score over time. This can help cement a solid
credit history, a key factor in the loan decision. If your credit score is not
sufficient for any mortgage loan type you can afford, and cash is tight, take
some time to focus on building your credit by making regular and consistent
however, your present score does meet the credit standards for the loan option
you’re eligible for, consider pulling the trigger. While it is always in the
best interest of the consumer to reduce debt costs, chasing a lower-cost
mortgage for what may or may not happen in the future can be risky.
Mortgage tip: If you’re
looking at a conventional loan with a 700 credit score or a little higher, and
you’re trying to obtain better rates and fees, you may be disappointed. Any
bettering of rate and fees will be due to market forces that are beyond
your control. Here is why: Due to minimal lending credit risk, there is not a
dramatic difference between a 700 credit score to even as much as a 740,
all other factors being equal on a conventional loan. More specifically, a 15
basis point price difference is to be expected, which by and large is not a
monumental change. For example, for a $400,000 mortgage, raising your
credit score to 738 might save you $600 in loan costs with the same interest
rate. If it requires paying more than $600 of debt to gain 38 points in credit
score, it may be throwing good money after bad, especially if your rate remains
say you are planning to buy a home. You can qualify for an FHA loan now with
3.5% down, but your score is 660. Even though you can afford the mortgage
payment, you decide getting your credit score higher is a better financial move
so you can secure a conventional loan with slightly more down. Lat’s say
you estimate that getting
your score to 700 will
take six to eight months.
approach can make sense, based on the mortgage numbers alone. But here is where
some exposure to financial risk may occur:
if you have the ability to improve your credit score by strategically paying
down specific debts that should earn you some credit score improvement. And as
you go through this process, it can help to track your progress—you
can get two free credit scores, updated monthly, on Credit.com.
That said, it’s always best to quantify the exact amount of
“benefit” to avoid throwing good money after bad. Often enough, the reward for
increasing your credit score may not be as big as you may think. Do your research,
get the facts, and then decide.
by Scott Sheldon – To view the original
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