That’s the money question isn’t it? It depends on how soon you want your mortgage to close.
A better question to ask:
“Despite the credit score being low can you qualify with income, credit score you have, assets and other liabilities as well as the total new monthly mortgage payment?”
If the answer is yes, raising your credit score to try to secure a better interest rate would be questionable. For example, if there’s other concerns associated with your ability to qualify, such as cash deposits going into your bank account, multiple businesses, an overly high debt income ratio, then you’re better served working on the adverse items necessary for qualifying down the road than simply trying to increase your credit score for a better interest rate on a loan that you can’t get anyway.
Makes sense right?
Let’s say you do qualify, credit score isn’t great, but it’s not terrible either, call it middle of the road, 680, your income is enough to offset all the monthly liabilities, including the new house payment and you have sufficient assets needed by the lender for successfully funding the loan.
In other words, increasing your credit score a few points isn’t going to do much, when you have a 680 credit score, that is unless you can get the credit score to 700 or above.
Interest Rate improves based on credit score alone under these three credit score groups
740 or higher
700 or higher
*Anything under a 700 credit score, pricing (interest rate) actually starts to deteriorate. This is why if your credit score is 620 through 699, in most cases, it makes sense to use the credit score you presently have as long as it’s within the 620-699 range rather than trying to play credit guru when chances are you’re not a credit score expert and doing something you think could be helping your credit score could end up having the opposite effect, lowering the score.
Most consumers are better served working with interest rate as determined by their credit score rather than making changes to their credit or liabilities in an effort to artificially increase the credit score for the purposes of getting a loan.
How interest-rate comes into the picture: it’s $7.25 payment change for every .125% change in rate for every $100,000 borrowed.
Put another way, the amount of time it would take to make a credit score go from 620, to 720 is the least 12 months. That’s 12 months you lose based on the opportunity presently available working with a credit score you have.
→Lost savings on a refinance or lost opportunity on a home purchase.
Additionally,the time and energy to prevent payment change of $14 per month on a loan amount $200,000 for example, would be significant. Meaning $14 per month on $200,000 borrowed, would be less expensive than the amount of time it would take to raise the credit score- to not have the interest rate rise the payment by $14 per month.
Moral of the story: if you can qualify for a mortgage whether that’s a conventional loan or an FHA loan or any other loan program on the market today, and your credit score is eligible and your income and liabilities are in line with the new mortgage payment you’re looking for, don’t let the prospect of a slightly better interest rate put you into a pursuit of chasing a moving target when you could otherwise qualify now. Interest rates are extremely favorable and they change daily anyway based upon market conditions.
RELATED MORTGAGE ADVICE FROM SCOTT SHELDON
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