Credit may be the biggest single factor in mortgage qualification. Certainly some loan officers fail to look beyond credit when they evaluate a loan application and may get caught at the end with another of the important details, but credit nevertheless does stand out as a primary approval factor.
In today's market with credit standards tightening and subprime programs unavailable, it is important that consumers, potential home buyers, understand the impact of their credit standing and what to do about it.
Most buyers learn very quickly about credit grading. I have many buyers contact me who already know their middle score. They might not know what the term middle score refers to, but they know the number.
The idea of credit scoring is that historic models of credit activity are used to predict default rates with individuals over the next few years. Credit scoring is intended not to punish previous credit difficulties, but to predict future credit difficulties.
Each industry has different models. The credit score given to consumers when they obtain their credit score, is not necessarily the same score that will be on a mortgage report or a report for a charge card or for a car loan. My guess is that defaults on these types of credit accounts are predicted by different historical models.
However, I think that the basic principles of credit scoring remain the same. I am not selling a CD series on the 7 steps for 700 scores. I am writing my thoughts on how credit impacts a mortgage loan approval and what principles can be applied to improve those scores.
Here is a link to FannieMae's pricing adjustments for credit scores. It is a little technical, but the point is made. To qualify for the best pricing, a borrower must have higher credit scores. In the past, if a borrower was qualified then the same rate was available regardless of the credit score. That is no longer the case.
And this does not even address the impact that credit has on the approval itself.
Other posts have put out the templates for the components of a credit score, and I may do that again in another post. My point here is to put out some general principles for the consumer to understand what can be done to improve a score. These principles are based on my personal experience with my mortgage loan clients.
And be aware that it is a myth that it takes a long time for the score to change. The score changes immediately when new information is reported. The delay in a score change is the delay in getting the new information reported.
If a score needs to be changed quickly, then get the new information reported quickly. But be aware also of this. When the new information is reported, the new score will reflect the new information as well as any other new information about other accounts that has been reported. Many credit reporting companies offer rescoring services. Generally these are not needed. They can be expensive and should only be used after evaluating the goal and the time line.
Another warning, it takes a little knowledge and experience to be able to predict the impact that the new information might have on a credit score. It does not always have the intended consequences.
Here are some principles.
Credit scores give more emphasis to recent activity. Be careful when working with older references that have not updated in the last year.
Some borrowers do not have recent credit references which the scoring engines can evaluate. Especially for borrowers with credit problems in the past, they need to open new accounts and give the credit bureaus new history to evaluate. Otherwise the only credit that is available is the older derogatory credit.
Different types of credit are weighed differentlly. Finance company and department store charge cards are viewed more negatively than mortgages and bank financing. Major credit cards are viewed as good credit references.
Credit is evaluated on the number of trades, the type of trades, and the length of individual trades and the total length of person's credit history.
Public records have done their damage when they are reported. Generally paying them has little impact on a credit score. Getting the record completely removed can have a significant impact on a credit score.
Credit card accounts can have a negative impact if the reported balance is high compared to the available high credit. If a card is maxed out, it is especially impactful if the card is also reporting a recent late payment. If you can increase the high credit, do so. If you cannot increase the high credit, you will need to pay the balance down.
Getting the balance to 50% or 25% of the available high credit can bring a drastic improvement to the credit score. There is probably a good term for this like LTV and DTI, but I do not know what it is - maybe BTHC ratio (balance to high credit)???
Authorized user accounts are no longer supposed to impact a credit score, but I think that they still have some impact. I have been told that the new credit reporting models will no longer even report authorized user accounts. This is too bad, because authorized user accounts were the way my children started their credit files.
A good first step is to verify that information on your report is at least accurate. If there are inaccuracies, determine whether it is worth the effort to correct them, or whether correcting them will help or hurt the score. Sometimes updating an older reference with correct information can actually reseason the account and that may have a negative impact.
Another consideration is whether updating a reference might actually cause the company to renew collection efforts on an old unpaid account. That is a real consideration in many cases.
Paying collection debts is seldom a good idea before closing on a loan, unless it can be negotiated with the collection agency to remove the debt. Remember paying a collection does not explain why it happened. Paying a collection because you want to get a loan approved does not really impress the lender. My recommendation is generally to submit the loan with an explanation, and let the lender tell you which they want paid. I focus on the explanation and try to make it explain something.
These are some principles that I have used to guide customers to credit restoration and loan approval. I take time to review each bureau thoroughly with them and to explain the impact of each trade.
After reviewing each trade and evaluating it impact, we set a credit goal and timeline based on their overall financial need and their resources. Each solution is different, but many things are possible when a person has knowledge of where they are and where they need to be.
My primary goal is loan approval - best terms, quickest loan approval, given the time and resources available. My secondary goal is a better informed consumer, who understands credit and its impact and who is better able to manage the credit rating.
I would love to hear from others with credit repair experience. Here also is an opportunity for credit restoration companies who want referral business from me to show their stuff.
Credit restoration can be tedious and tough. There are many cases when it takes a professional, and the potential gain is worth the cost.
For instance, with some lenders who might still do 580 score FHA loans, the loan pricing adjustment can be high.
It might change the monthly payment by $50 for $100,000 loan. How much is it worth to have a professional work to improve that score to save the $50 monthly in a payment?
How much time is it worth the new home buyer to commit to improving their score? Buyers should evaluate the benefit of the potential improvement, the likelihood of the potential improvement, the resources available to bring about the improvement, and the cost in money and time to accomplish the improvement.
It might make the difference between an approval and a denial. I am beginning a section on my website that will have a focus on credit repair information.
You will find a mortgage professional here. Whether you want conventional, FHA, VA, Rural Development, Reverse Mortgages, Construction Permanent, credit guidance, mortgage or home or other information in Tennessee, Georgia, or Alabama, call me, Richard Smith:
toll free 888-474-9920 cell phone 423-899-6898 email: Richard@RichardSmithHomeLoans.com.
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