Credit is the biggest hot button topic in mortgage lending by far. Most would probably agree, any time you can raise your credit score to improve your mortgage scenario, take advantage of it. Every situation is different and here’s what to be mindful if your credit needs a little love.
There are three different loan types available on the broader mortgage market today which includes conventional, FHA, or Jumbo. Yes, just three choices. Your credit score determines just two things when it comes time for a loan; program eligibility, followed by interest and costs.
Your required middle credit score varies by loan type:
- Conventional Loan: 620 or better
- FHA Loan: 600 or better
- Jumbo Loan: 680 or better
Before going the easy route and just assuming that you need to improve your credit score to be credit worthy, talk with an experienced loan professional. The goal is to determine whether or not you can qualify with the score you have now, and if yes, does it align with your financial goals? If not, taking action worthy steps can be more technical. Typically, clear and specific action must be followed to improve your credit score. The “I’m going to pay my debts down” thinking will not cut it.
Mortgage Tip: A higher credit score will help you secure a more favorable interest rate and will keep the payments low while improving borrower power.
Pay Attention To These Credit Areas When Considering A Mortgage
→Utilization of credit- the fastest way to get your credit score higher is to strategically pay off the debts pulling your score down. Simply put, the biggest reason why credit scores are low independent of the late payments, collections, derogatory marks, and little credit history is utilization of credit. Utilization of credit is an enemy of a high credit score as it signifies you’re overextended on credit. When you utilize half or more of the total credit limit on any credit account, you have a high utilization of credit being consumed. The key is to not utilize your full credit capacity or if you must carry debt, spread it out over multiple accounts. This also should lower the minimum payments associated with the debt, enhancing borrowing ability.
→Cost/Benefit-A good mortgage company can cherry pick which debts to pay off or eliminate completely. This is how you quantify how much benefit there is improving your credit for better rates and fees.
Mortgage Tip: if you’re looking at a conventional loan with a 700 credit score or little higher, and you’re trying to obtain better rates and fees, you may be disappointed. Any bettering of rate and fees will due to market forces which are beyond your control. Here is why-due to minimal lending credit risk; there is not a dramatic difference from 700 credit score to even as much as a 740, all other factors equal on a conventional loan. More specifically, a 15 basis point price difference is to be expected, which by and large is not a monumental change. For example on a $400,000 mortgage getting your credit score up to 738 might save you $600 in loan costs with the same interest rate. If it requires more than $600 on debt pay downs to gain 38 points in credit score, it may be throwing good money after bad since especially if the rate remains unchanged.
→Time-Responsibly paying liabilities on time without missed payments or an unpaid balances is sure fire way to help your score. This helps cement a solid credit history, a key factor in the loan decision. If you’re credit score is not sufficient for any mortgage loan type you can afford, and cash is tight, take the time route and focus on prioritizing your credit with regular and consistent payments.
If however, your present score does meet the credit standards for the loan option you’re eligible for, consider pulling the trigger. While it is always in the best interest of the consumer to reduce debt costs, chasing a lower cost mortgage for what may or may not happen in the future is risk.
Let’s say you are planning to buy a home, you can qualify for an FHA Loan now with 3.5% down, but your score is 660. Even though you can afford the mortgage payment, you decide getting your credit score higher is a better financial move so you can secure a conventional loan with slightly more down. It is estimated getting your score to 700 will take 6-8 months.
This approach does make sense strictly focus on the mortgage numbers alone. Here is where some exposure to financial risk may occur:
- If rates rise borrowing power drops, meaning the same priced home in 8 months could end up costing more resulting in a higher payment, despite a higher credit score
- If housing prices rise, borrowing power also drops and your cost of housing increases due to paying more for the same home
- If housing prices rise, you will be need more cash to get your foot in the door with the form of down payment and closing costs possibly interfering with capital needed to accomplish credit enhancement plan
Generally, if you have the ability to make a dent in your credit score by strategically paying down specific debts that should earn you some credit score improvement, but it’s always best to quantify the exact amount of ‘benefit’ to avoid throwing good money after bad. Often enough, the reward for increasing your credit score is not a big as you may think. Do you research, get the facts, and then decide.
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