Know the Score and Get The Best Possible Mortgage Rate

Has this happened to you? A hopeful young couple recently filled out all the paperwork to get approved for a loan and was shocked to discover the high rate for which they qualified. “But I checked my credit score online!” said the young man.

“Many people rely on those quickie credit score calculators online and don’t realize that mortgage underwriters use different factors to figure credit score,” says Lynn Hood, loan officer at Guardian Mortgage Company’s Arlington, Texas office. “Even if you get a credit score from one of the credit bureaus, it may not be the same as the score used by a lender or take into consideration all the factors we have to.”

Fewer than one in five people actually obtain copies of their credit reports on an annual basis. The most effective way for consumers to identify errors in their reports is to review them annually.

So what is credit score and how can you make it better? According to Hood, a credit report is simply a tool to help lenders assess this risk of lending to a potential borrower by providing their credit history and the score provides the ranking for credit quality of that history with the potential for default. Statistically, potential homebuyers with a score of 600 or less, for example, have an 87% chance of default while those with 700-719 only have a 5% likelihood of defaulting on the loan.

“Credit score can make a huge difference in the interest rate you will pay on your mortgage – most likely the biggest thing you ever buy,” notes Hood.

What is in Your Credit Score?

1. Negative events like bankruptcies, liens, collections, foreclosures and slow pays. “Depending on the seriousness of the event, it can stay on your report for as long as 7 years,” said Hood. “The older the negative event, the less impact it has on your score.”
    
2. A ratio of your debt balances (like credit cards) to available credit. “Low balances are good,” adds Hood. “There is no ideal utilization of credit card availability credit, but keeping any one card – and the total balances across all cards – to less than 50 percent is preferred.”
    
3. Public record information. “If you have a lot of unpaid speeding tickets, it will affect more than your car insurance rates,” warns Hood. “Some public record items can remain on your report for 10 years, so avoid judgments from unpaid tickets and other legal actions.”
    
4. Number of recent inquiries which means credit applications you’ve made – not inquiries by credit companies looking to pitch you a new card or insurance companies you engage to change car insurance. Now is not the time to buy a new car or replace the refrigerator if you can help it. “Limit your new credit account inquiries to maximize your score.”
    
5. Number of credit lines on your report. “Too many credit cards and credit lines can lower your score. The score benefits those with a balance of credit cards, installment loans and mortgages.”
    
6. Number of years you’ve had credit reported to the bureau. “The longer the history the better, but people in their twenties can qualify for homes,” adds Hood. Establish a solid record of pay history as soon as possible. Typically, the best approach to developing a credit score is to have three credit lines “open for no less than 12 months.”

There are differences in the scoring models consumers can access vs. those credit lenders may obtain. However, the differences are not typically sever with only one in four being a credit-quality category impactor.

Consumers cannot know ahead of time whether the score they purchased from an online site will closely track or vary moderately or significantly from a score sold to creditors. Thus, consumers should not rely on credit scores they purchase exclusively as a guide to how creditors will view their credit quality.

Much like a grade in school, different factors on credit scores are weighted. On-time payment is about 35% of your score; outstanding debt (balances) is 30%; credit history is 15%; inquiries and new credit is 10%; and types of credit are 10%.

“Some people erroneously think they need to have lots of different types of credit to get approved for a mortgage, but it is only 10% of the overall score. Having a low balance and on-time payments are much more important,” says Hood.

Six Ways to Improve Your Credit Score

1. Pay your bills on time.
2. Keep your credit card balances low.
3. Clean up judgments, liens and other delinquencies from your credit bureau reports.
4. Don’t open new credit accounts unless absolutely necessary.
5. Don’t close your oldest credit accounts unless absolutely necessary.
6. Correct common errors on your report like incorrect loan balances, credit limits, delinquency dates and open/closed statuses.

The first step is to get your credit report from each bureau. They are required by law to make it available for free to everyone once per year. You can get yours online or by mail. Review it carefully. It is not uncommon for there to be mistakes.

Experian: www.experian.com
Equifax: www.equifax.com
Transunion: www.transunion.com

When you note a mistake, send a letter (with delivery confirmation requested) to both the credit bureaus and the creditor explaining what is in error. Provide your back up documents, but don’t send your originals. Include a copy of the credit report you used to identify the error and ask that the information be corrected.

Why should you send multiple copies (one to the bureaus and one to the creditor)? Because credit reporting companies resolve an average of 15 percent of the consumer disputed items internally, without getting the data credit furnishers involved. The remaining 85 percent are passed on to the creditors. Ensuring both parties have the needed information improves your ability to have the issue resolved in a timely manner.

Here are a few points that the CFPB recently reported about consumer’s experiences with working with credit bureaus:

• More than a third of disputes have to do with collection accounts
• Collections are 5 times more likely to be disputed than mortgage delinquencies
• Few than 1 in 5 people obtain a copy of their credit report on an annual basis
• 1 in 5 consumers will receive a credit score that is substantially different than what the lender or creditor will see

“People are often surprised at what they find on their credit reports. We especially see mix-ups with people of the same name like “Senior” and “Junior,” or old items that were never removed that should have dropped off after a certain amount of time. Collections agencies are particularly bad about recording payments to the credit bureau.”

Each credit bureau has a process for correcting mistakes. Often it is as simple as providing proof of payment or disputing an item. Disputing an item will cause them to begin an inquiry with the credit reporter. It can take weeks and you will want to make sure to get another copy of your report before moving forward on your mortgage application.

If your credit card balances are high, you may want to consider spending a few months paying them down before applying for a mortgage.

Lastly, don’t apply for new credit for a while. It makes it look like there may be additional debt unknown to the underwriter or that your spending may be increasing. After you get your home, you can then get other loans for life’s necessities.

“There are a lot of factors and your score is constantly changing,” said Hood. “Clients with a poor or too-low credit score can usually improve it significantly within six months to a year by following these steps.”

So what happened to the young couple? “They decided to wait a few months until they could get their credit report corrected,” said Hood. “Now they have a home at a low rate with the payment they can afford.”

Have more questions about improving your credit score? Contact an experienced loan officer like Lynn Hood at Guardian Mortgage Company today about your specific situation. Guardian Mortgage Company has been serving North Texas since 1965. Lynn Hood (817) 261-7235 or LynnHood@gmc-inc.com.