Trying to understand Credit Scores can seem to be complex at times, especially when there are so many so-called experts online and or credit repair companies. Trust me, I have sat next to loan officers in the past that just made up things as they went along.
Many that come to me and seek my help or advice usually seem to be those borrowers that were previously approved. Yet are denied last minute and in most cases it was because of their credit. And for two months while in processing, that borrower was told all was okay. So how can this be?
In my own opinion, there are three main factors that a loan officer should look at.
1.) Credit scores aka fico scores
2.) All items that are derogatory, to include : latenesses, judgments, collection accounts, bankruptcies, etc
3.) Your credit balances vs your credit limits, to see if you abuse your credit.
What I seem to find that happens in many cases is that the loan officer dwells on the credit score the most, thinking that the deal should not be as difficult if that borrower meets the credit score requirements. Or for the fact that they can’t distinguish less than perfect credit for bad credit. But lately, I am finding more borrowers that were told no problems during the process and their credit scores were between 580 and 619. Here is the reality of it. Most lenders now require 640 or higher. Yes, FHA allows a borrower to go to 500, while on conventional loans you can go to 620. And there are some, such as Infinity Home Mortgage, where we can go to 620 on a case-by-case, if the loan makes sense and the borrower meets the basic guidelines pertaining to debt ratios. Here is the problem. There are a few lenders that will portfolio their loans and go as low as 580. Not only are the rates about 1.5 percent higher than normal market rates, that come with a few more points, but have more lender overlays regarding the lending guidelines. Yet it is very hard to close these loans. Even though I could broker out these types of loans, I tell the borrower that it is best to get their scores up to 620 or higher for various reasons.
When dealing with a lender when you have lower credit scores, your first question is, “how do I get them higher?” This can be such a dangerous question, because there are so many different answers and some are either wrong or misleading.
Example : If you have collection accounts that are two years or older, you should not pay them off at all until you go to settlement. When you pay anything off, that creditor or collection agency will be reporting this to the credit bureaus, which creates a new date. This does affect your credit score for the worse. I tell people not to pay off a thing until settlement, if requested to be paid off.
How can you increase those credit scores?
- Keep your balances at thirty percent or less of your high credit limit. The higher the balance to credit limit, the more it will hurt your credit score.
- If you don’t have many open trade-lines, you should obtain new credit. "Well, I can’t get a credit card, I tried and was denied." You can get a secured credit card. Just get a $250 limit and keep your balance at $25. Make a payment as soon as you can, not waiting for your bill. Then ask if you can get a letter stating that you made a payment on time and the lenders credit agency might be able to re-score your report. If not, you will just have to wait the full thirty days.
- Credit latenesses – We know that 30 day lates hurt, but what can hurt more are 60 and 90 day lates. Your scores will get a tad better after three months, as long as you aren’t late on anything else. But these credit scores can improve drastically after six full months, as long as you aren’t late on anything.
- I talked about keeping your credit balances low. Sometimes if you even pay down your balance even more, this could help your score.
Example 1 : I have a client who has a mid score of 587. They have one credit card with a credit limit of $6,500 and currently have a balance of $4,000. If they paid it down the normal 30% limit, that would be $1,950 and their score would rise about 16 points. If they pay it down to a balance of $750, their score would increase another 19 points, for a total of 35 points.
Example 2 : The same client also has a card with a $351 balance and their credit limit is $600. To pay it down to the 30% level won’t do much, about 5 more points. But paying it off completely, they will get another 7 points, totaling 12 points. Overall, I am now increasing their credit scores by 47 points. And this will get their mid credit score to 636.
Conclusion: You need to deal with a loan officer that not only understands these different scenarios, but one who has access to a credit analyzer. Never assume what you should do from those on the internet, or from a family member, or from credit repair companies that tell you the world. If they didn’t run a credit analyzer/simulator, then it’s all a guess, with hope and a prayer. And if the lender doesn’t have access to a credit analyzer, then seek one that does.
Key Reminder : Unless instructed to do so, never pay off your credit cards. Keeping a running balance on revolving credit will help if under control. Paying off installment loans won’t really help your credit scores.
Key reminder when others check your credit scores. If you get an outside source such as True Credit Report or Free Credit Report, your credit scores will usually be higher than when a mortgage company pulls your credit. Why? Because each uses a different logarithm. Just as those that give out car loans, they have a different logarithm.
Disclaimer : I don’t work for a credit agency nor should I be considered a true credit expert. However, I do understand more than the basics and this information is based on my knowledge and research from many years in the mortgage industry.
PS.. don't hesitate to reblog this for your clients and or readers. Thanks
My New Years Gift to all of you.... something that took me a day to put together, like a mini book with many ideas for better business in 2011.