Credit Scores Part 2 – Understanding your Credit Scores

By
Mortgage and Lending with Social Media - Infinity Home Mortgage Company, Inc

 

credit scores

 

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.

Your 2011 Business Plan - Keeping your eye on the moving target

thanks

 

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Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc

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Re-Blogged 11 times:

Re-Blogged By Re-Blogged At
  1. Marilyn Boudreaux 12/30/2010 06:03 AM
  2. John Mulkey 12/30/2010 06:19 AM
  3. Debbie Laity 12/30/2010 06:22 PM
  4. Blatt + Cutino 12/30/2010 11:35 PM
  5. Wendy Hayden 12/31/2010 12:54 AM
  6. Bill Burchard 12/31/2010 02:44 AM
  7. Dagny Eason 12/31/2010 10:55 AM
  8. Gene Riemenschneider 01/01/2011 08:23 AM
  9. Patricia Aulson 01/02/2011 12:59 PM
  10. Gabe Sanders 01/03/2011 02:19 AM
  11. Atlanta's Home Inspector, David Lelak IHI Home Inspections 01/05/2011 02:01 PM
Topic:
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Location:
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Tags:
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Show All Comments
Rainmaker
1,917,336
Michael J. Perry
KW Elite - Lancaster, PA
Lancaster, PA Relo Specialist

Jeff this is a very good post !!! Worthy of both a reblog and Bookmark !!!!!!!!!!!!!!!!!!!!!!!!

Dec 31, 2010 01:03 AM #21
Rainmaker
1,116,153
Gary Frimann, CRS, GRI
Eagle Ridge Realty / Signature Homes & Estates - Gilroy, CA
REALTOR and Broker

Jeff, great post.  I just sent it off to all my agents who always seem to be asking me this question (I am a former lender) as their clients always ask them this question (shouldn't they be asking their loan agent--or perhaps they already had, but did not get the answer they were seeking...)

Dec 31, 2010 01:53 AM #22
Rainmaker
1,619,355
Lyn Sims
RE/MAX Suburban - Schaumburg, IL
Schaumburg Real Estate

Great post with a solid explanation. Not to mention when buyers are marginal, any little blip on the radar down is bad news.  I like the 'lender overlays' - great way to explain the jump thru multiple hoops for the loan scenario.

Dec 31, 2010 02:47 AM #23
Rainer
79,811
Jeff Getman
Realty Executives of Ravalli County - Hamilton, MT
Realty Executives

I've seen first hand in a number of cases where the credit card companies just arbitrarily lower credit limits, thereby damaging someone's credit score. I really wish there would be some normally "blood sucking lawyer" out there that would take on the banks as a class action lawsuit. The banks should not have free rein to damage or destroy someone's life.

Dec 31, 2010 03:14 AM #24
Rainmaker
125,023
Brett Dalbeth
iPro Real Estate - Laguna Niguel, CA
Laguna Agent
Nice post. There is too much confusion out there when it comes to credit and it's such a big deal. Many people that have great income etc just have no idea how the system works. One thing I here all the time is ok I just paid off all my credit cards but my credit went down. My first question is did you cancel the cards? They are supprized when t tell them they just lost there credit history for those cards. Remember cut don't cancel.
Dec 31, 2010 04:04 AM #25
Rainmaker
219,976
Judy Orr
HomeSmart Realty Group - Orland Park, IL
SW & Near West Chicago suburbs

I'm going to read the whole series.  I'm surprised I wasn't already subscribed to your blog, but I am now.

I mentioned this before once on AR.  My husband and I use our credit cards for anything over $10.00 (we are now using our Southwest Airlines card primarily).  We pay it off every month.  Two years ago when we purchased a 2nd home townhouse in Scottsdale, AZ, that kind of bit us in the butt.  Our report said something to the effect that we had too high balances on our cards, even though they were paid down to zero every single month.  We got the loan and the LO told me that was just a "comment", but it bothered me. 

Dec 31, 2010 05:12 AM #26
Rainer
69,204
Robert Courtney
Lihue, HI
Century 21 All Islands, RA, CDPE, MCRE, CIAS

Bookmarked!  Happy New Year! 

Dec 31, 2010 05:53 AM #27
Rainer
106,947
Jan Stevens
Coldwell Banker Pittsburgh - Cranberry Township, PA

Really useful information on a confusing subject, and presented in a clear, understandable way. Thanks! (I am now a subscriber.)

Dec 31, 2010 06:43 AM #28
Rainer
60,942
Dennis Neal
RE/MAX, Big Bear - Big Bear Lake, CA
Your Home Sold in 45 Days or We Se

Bookmarked to share with my clients. Usually if a client asked me how to improve their credit score all they would get is a blank stare.

Dec 31, 2010 06:46 AM #29
Rainmaker
367,644
Woody Edwards
First Choice Realty, Inc - Chesterfield, VA
A Realtor® Who Answers His Phone!

Thanks for the excellant information.  I knew alot of this but there were several items in your piece that made it begin to come together.  I love the part about the credit analyzer/simulator. 

Dec 31, 2010 07:16 AM #30
Rainer
222,458
Jirius Isaac
Isaac Real Estate &TriStar Mortgage - Kenmore, WA
Real Estate & loans in Kenmore, WA

Jeff, You are spot on as usual.  As a loan officer & real estate broker, it is amazing how many times I meet with a new client & they tell me they waited to buy a house until they paid off some of their old debts!

Dec 31, 2010 09:31 AM #31
Rainmaker
1,081,635
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate

Awesome article as usual Jeff!

Dec 31, 2010 09:58 AM #32
Ambassador
750,410
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

MICHAEL... . thanks for reblogging this and for the polite compliments.

GARY... . thanks for sharing this... I did send this off to 3 different people that deal with credit and work for credit companies. They basically said it was good info and easy to understand from how it was written. And thanks for the compliment.

LYN.... . any little blip?  lol  It's like say, if you see an ant one minute, teh next minute it could be a cat. Maybe a bad analogy, my brain is tired... but yes, the littlest things can make a deal crash and burn. The problem with this, in many cases, the deal already crashed and burn, yet loan officers use this as an excuse when they give the bad news last minute.  And thanks for the kind words and for the compliment.

JEFF... . I agree and understand the frustration... but simply put.. "he who holds the gold makes the rules"... thus they can change them any time. I know, it mind sound harsh.. but if borrowers weren't so borderline, then that wouldn't be an issue. My point? I have seen many borrowers that were maxed out to their credit limits, yet they had very good credit scores. Because they still paid their cards on time and didn't have collection accounts. So again, I understand the frustration, but I wouldn't say that banks are ruining people's lives... it starts with the consumer... just my thoughts & opinion...

BRETT.... . if you actually think about it, it makes total sense. How can a system determine that you are a good credit risk if you don't have anything to pay monthly. But yes, people wouldn't think paying off items helps. Now, I will say this... no credit is good credit. Okay, so you have no scores... I can deal with this a lot easier than someone that has less than perfect credit and then pays off their cards. And thanks for the compliment.

JUDY.... . I am surprised also.. LOL <teasing> Hey, just to many on Active Rain that post and if you don't come across someone, how do you know how good they are, what they write, or what they write is actually good.  In regards to your comment about your high limits and paying off your cards every month... think about it though, it makes sense.. you are still considered some what of a risk, because you max out and then pay down. What happens if you can't make payments the following month?  Thanks for the feedback and thanks for subscribing. You will now be receiving your free subscription button. ;o) <teasing.. but seriously, thanks)

BOB... . thanks and Happy New Year to you too..

JAN... . thank you very much. I am always afraid to write these kinds of posts... making sure that they are easy to understand. I guess I am glad that I don't have a Harvard mind or one of a Chemical Engineer.. ;o)  Then it would be confusing... and thanks for subscribing.

DENNIS & TERI... . thanks form sharing this and yes, I can see why many would get a blank stare.. this stuff can be very confusing...

WOODY... . my pleasure.. and I am glad that I could clarify some things or bring the pieces of the puzzle together.. so thanks for your feedback.

JIRIUS... .  yea, I try to put it out there... if you consider on trying to buy a home, "Do Nothing" until you speak to a mortgage professional.. don't assume.  Thanks & thanks for the kind compliment.

BILL... . thanks for that polite compliment..

 

Dec 31, 2010 10:44 AM #33
Ambassador
750,410
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

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.

Your 2011 Business Plan - Keeping your eye on the moving target

thanks

Dec 31, 2010 10:46 AM #34
Rainer
132,968
Roseanne Campagna
John L. Scott RE Maple Valley, WA - Maple Valley, WA
Kent/DesMoines/Blk Diamond/Renton/Maple Valley, WA

Jeff.

I think folks with good credit scores could benefit from reading these two posts. Thanks and I'd like permission to share with others!

Roseanne

Dec 31, 2010 11:40 AM #35
Rainmaker
1,613,943
Marte Cliff
Marte Cliff Copywriting - Priest River, ID
Your real estate writer

Thanks for the good information. I read about credit all the time for a client I write for - and I had not come across the information on not paying off a collection because it would re-set the date. I can see where people who were trying to make things better would actually make them worse.

Helping people improve their credit scores is not a job for an amateur!

Dec 31, 2010 05:20 PM #36
Rainer
18,286
William Haddad
Capital Mortgage Solutions - Noblesville, IN
Carmel, Fishers, Noblesville

Well said Jeff!!

Jan 01, 2011 01:57 AM #37
Ambassador
750,410
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

 

ROSEANNE... . I think anyone, good or bad credit, could benefit from this kind of stuff. And yes, you can always use any of my stuff, as long as I get mentioned or pointed back to www.fhaloansfhamortgages.com And you can also reblog this post.  thanks

MARTE... . I am glad this post helped some, because I hear that the most, that many didn't know paying off collection accounts prior to settlement could hurt the credit scores.  And thanks for the compliment.

WILLIAM... . thanks, my pleasure..

 

Jan 01, 2011 06:18 AM #38
Rainmaker
1,431,729
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

Thanks.  This is really importan information for buyers who are having trouble qualifying.  I will reblogg it.

Jan 01, 2011 08:21 AM #39
Rainmaker
648,660
DeeDee Riley
Lyon Real Estate - El Dorado Hills CA - El Dorado Hills, CA
Realtor - El Dorado Hills & the Surrounding Areas

Jeff, great article.  I am posting it to my facebook as I think it's information all should know!

Jan 16, 2011 08:35 AM #40
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