Raising Credit Scores for Home Loans
While most mortgage applicants know a good credit score is a key element for a loan approval, not everyone realizes raising your credit score by even a few points can make the difference between qualifying for a mortgage or not. In addition, if you are applying for a conventional mortgage rather than an FHA-insured home loan, you can pay a lower interest rate if you are able to boost your credit score into the next level.
A borrower with a credit score of 702 will pay a one-fourth-percent higher interest rate than someone with a credit score of 720, even though those are both good credit scores. Mortgage applicants with severe credit challenges may need six months to a year or longer to improve their credit score, but those who are looking for a smaller boost can work with a lender and take steps for a faster score increase.
Consumers should check their credit score with all three reporting bureaus a minimum of three months before applying for a loan, although checking 12 to 24 months before applying would be better. In spite of the varied credit scores, consumers should check their credit report and credit score at least annually to look for errors and address any negative information.
One thing many consumers don’t understand is that the credit score you see as a consumer is different from the one an auto dealership sees if you are applying for a car loan, and both are different from the score a mortgage lender sees — each one is weighed differently. For example, the credit score model one lender might see would weigh your housing payment history more heavily than other factors.
A lender can work with a borrower to figure out what they can do that will have the fastest impact on their credit score. The impact depends on your individual credit report. Some people have a perfect payment record but a lot of debt, while others have collections that need to be dealt with.
Some of the steps that can be taken to improve your credit score may seem counter-intuitive, such as keeping accounts open if you don’t intend to use them. While it may make sense from a financial point of view to close two older credit card accounts and keep two new ones with lower interest rates, closing a credit card account will automatically lower your credit score. While there are certain rules to follow to improve your credit score, some situations can be tricky to navigate.
If you have a small collection account, such as a medical bill you didn’t know about from a few years ago, your instinct might be to pay it off. The problem is, paying it off will make it look like a recent credit problem and will lower your score. It’s better to leave it there and then take care of it after your loan has closed. If the only derogatory information on a credit report is more than two years old and lenders can qualify the borrower without fixing it, they will usually leave it alone until the mortgage loan has closed.
Borrowers with credit card debt should keep their balance on each card to 25 percent of the credit limit, but other lenders say 30 percent is acceptable. If you can pay down a credit card to under 30 percent of the limit or at least redistribute your debt by transferring a balance from one account to another so that each balance is less than 30 percent of the limit, you can improve your credit score by 20 or sometimes even 40 points — that depends on what else is on the credit report.
Lenders can request a Rapid Credit Rescore if they have proof of a change, such as a copy of an updated credit card statement showing that the balance has been reduced. Borrowers with enough cash would be better off if they can eliminate their credit card debt. Some people’s credit scores have been damaged when their credit card company reduces their credit limit, While it may not always work, you can call your credit card company to see if they will restore your limit so that it doesn’t look as if you have maxed out your card.
Some consumers have items on their credit report that are dragging down their credit score. It may be in their best interest to pay off those items. It could be better to pay off a medical collection or an old parking ticket rather than not qualify for a loan or pay thousands of dollars because of higher interest rates over 30 years.
If you have disputed claims on your credit report, you will need to resolve those issues before a loan can be approved. Removing a dispute won’t necessarily send your credit score up, in fact, it could even lower your credit score. But until it’s resolved, lenders don’t really know what your true credit score is.
Some loan applicants have a problem that shouldn’t be one — a lack of credit card use. It’s a Catch-22 that you need a credit history in order to get a loan. You need to open a credit card account and use it and then pay it back on time in order to build a credit history. You need to use it for one or two months to show a repayment history. Applicants without credit card debt can improve their score if they use a dormant credit card to charge something and then repay it.
Sometimes the only option for someone without a credit history is to try for a loan approval based on nontraditional credit history, such as rent payments, insurance payments and utilities. Other than that, they may have to wait while they build a regular credit history.
Making long-term changes in your financial habits will do the most to improve your credit score, but for a short-term fix, borrowers should consult with a responsible lender who can make specific suggestions tailored to the individual’s needs.