BEFORE BUYING A HOME, MAKE SURE YOUR CREDIT HOUSE IS IN ORDER

Scoring your credit – what you need to know about improving your credit score, and how it affects your potential mortgage

The lending landscape for homebuyers has changed substantially over the last couple years given tightening of credit parameters due to federal guidelines and economic conditions. While it’s true that American mortgages are continuing to evolve, there’s still one thing home buyers can count on. Credit scores make a big difference.

How much a difference that score can make, and whether there is anything buyers might do to improve their score are both important pieces of a total financial picture – and not just when you’re buying a home.

How credit scores affect your financial health

Credit scores can affect everything from the kind of car insurance you can get to the type of cell phone agreement you can negotiate. Your credit score can even determine whether or not you qualify for a job, especially if you apply for a job in any realm of the financial world, from bookkeeping to investment managing or even managing properties.

“In today’s market,” said Jill Aguirre, senior loan officer with Virden Mortgage in Phoenix, “the big banks have tightened score requirements.”

The days of borrowers qualifying for a loan with a credit score at 580 or lower are over, and they’re not returning any time soon, she added.

Why you need a higher credit score

In fact, two of the most important mortgage options for potential first-time buyers, Federal Housing Administration (FHA) and Veteran’s Administration (VA), now require a minimum credit score of 620.

“Conventional mortgage programs, loans insured by Fannie Mae or Freddie Mac, will require an even higher score, as well as a down payment,” Aguirre said. That makes a good credit rating almost an essential for conventional mortgage packages.

“Interest rates are calculated on risk-based pricing, and that will affect any kind of loan you’re seeking,” Aguirre explained.

While securing pre-approval for a mortgage is still the best way to assure that your loan application will sail easily through the final process, even pre-approval can require a thoughtful approach.

Pre-approvals are intended to be completed within just a few days, and that means being as sure as possible that all of your credit information is accurate and up-to-date before the pre-approval process begins.

When prospective buyers begin the loan process, Aguirre said that it’s common for the mortgage company to review credit scores. At that time, Virden clients may be referred to a special service, Credit Solutions.

“Credit Solutions does not create a long, drawn out process. It may take only between three to six months and credit scores can be improved greatly,” Aguirre said.

While some clients may be initially disappointed that loan approval isn’t readily forthcoming, resolving credit issues is key to improved financial stability and the ability to move forward with major purchases – such as a new home.

How Credit Solutions works with potential buyers

“We work directly with buyers who currently do not qualify for a major loan of any kind,” said Danielle Gross, of Credit Solutions, “as well as with buyers who qualify but who, with an improved score, will get a much better rate based on risk-based borrowing.”

Currently, 620 is the benchmark score for qualification, she explained. “We work with people who have credit scores as low as 475, and develop unique plans that can help them improve their scores.

“It’s important to understand that each buyer has unique issues and challenges, and this demands a completely customized plan,” Gross said. Each plan does have core elements, including credit repair and paying down of revolving debt.

“We rarely see borrowers with a totally clean slate. For some buyers, credit repair can take up to nine months, because it’s critical to rebuild a payment history,” she said.

Credit repair begins with a good look at every derogatory line in a customer’s report. Any account that’s been turned over to a collection agency can be extremely worrisome, because, Gross pointed out, “Your debt could be sold to another collection agency and then it becomes a separate collection line in your report.

“We’ve had some clients whose debts in collection were sold more than once, adding multiple collection debt lines to their reports.”

Gross and her team work closely with prospective borrowers in credit repair, disputing every possible derogatory line and ascertaining that each is in fact a report against the potential borrower.

They also look for inaccurate report lines, as well as double-checking to be certain that every report matches the borrower in every respect.

“We need to be sure it’s the right person. If the buyer has a common name, this is especially critical.”

Steps to take that can improve your credit score

• Make sure you have a “well-rounded” credit history, with some diversification in the kinds of credit you’ve had.
• Pay down your lines of revolving credit, like department store charges.
• Distribute your credit card debt. If you have some cards with low balances, and one with a very high balance, transfer some of the debt to the other cards. This will change your ratio of debt to available credit and improve your credit score.
• If you have a credit card with a zero balance, make a small purchase, rather than closing the card. The card will show as an active account on your report, and you will get points for your long-term history.
• Wait until after your loan is approved to pay off old collections or charge-offs. The lender looks at activity within the last two years – and collections stay on your report for seven years following the last activity on the account.
• Keep your credit cards at or below 30 percent of the available limit. A maxed out or overcharged card can drop your score by as much as 100 points.
• Continue to stay current on your cards and use your cards as you normally would.
• Always make at least a minimum payment on any card, and be sure you make a payment every time.
• Make sure you’ve deferred or are current on any student loans, and have a plan for payment.

“This is a very important time for first-time and experienced home buyers,” Jill Aguirre said. “There’s a window of opportunity with tax credits available for first-time buyers, very good purchase prices and mortgage availability that will likely approximate any rental payments people make. It’s time to think about buying that house.”

But first – make sure you have your credit in order.

Five Factors of Credit Scoring

Your credit score is made up of five financial pieces, with points awarded for each piece. A high score here is what you want.
1. Payment history counts for 35 percent. This is where paying on time and in full has the biggest impact, with late payments, charge offs and judgments counting as negatives.
2. Outstanding credit balances count for 30 percent, and mark the ratio between your outstanding debt and available credit.
3. Your credit history contributes 15 percent to your score, and means the length of time since credit was established.
4. The type of credit you have counts for 10 percent, which is why a mix such as a car loan, mortgage and credit cards count in a positive way.
5. Inquiries about your credit have a 10 percent impact on your score, with each inquiry counting from two to 25 points. This is why you don’t want to open a new credit card while you’re in the mortgage-qualifying process (but you can run a credit report on yourself with no impact on your score).

How a medical or dental collection might affect your score

Medical or dental offices can be very quick to turn an unpaid or disputed account over to a collection agency. Danielle Gross recalls a recent prospective home buyer whose dentist had turned over a $96 bill to a collection agency.

“When the report showed up on his credit score, it cost the borrower 80 points on his credit report.

“Meanwhile, he was certain he’d paid the bill. In fact, he had, but the payment had been received after the dental office had sent notice to the collection agency.”

The borrower secured a letter from his dentist attesting to the payment, and 85 points went back on the man’s credit score.

“Those points saved him $2400 on a $160,000 loan,” Gross explained. “And that’s why it’s so important to avoid current activity on collection accounts.”