Posted July 14, 2014Tweet
Mortgage rates today are low, but did you know you get your rate even lower? The trick is to boost your credit score, which is actually pretty simple.
Your credit score is based on a system and the system can be worked. With higher scores come lower mortgage rates plus access to additional home loan programs.
Government-backed loans such as the low-downpayment FHA loan and the zero-money down USDA loan allow for below-average scores; but in order to get the best conventional mortgage rates, you'll want to have the highest credit scores possible.
Buying a home in 2014 or 2015? Understand how credit scores work, and take steps to improve your score.
Credit reports are an official record of your financial history, detailing everything from auto loans you've taken, to credit card balances you've carried, to liens and bankruptcies linked to your name.
Generally, information added to your credit report remains for seven years. In some cases, information is permanent. The details of your credit report determine your credit rating.
Credit ratings can be based on an Alphabetic System (AAA through F), but are mostly commonly scored numerically.
Mortgage lenders use credit scoring systems which range from 300 at the low-end to 850 at the top-end.
Today's home buyers and refinancing households can get mortgage-approved with credit scores above 500, but having a better credit score often means having access to a lower mortgage rate; to additional loan programs; and, to the right to buy a home with little or nothing down.
Furthermore, the benefits of having a high credit score extends beyond home loans.
For example :
In other words, having a high credit score can be paramount to getting the best rates, to paying the fewest fees, and to realizing the biggest monthly savings that are available to you.
Even better -- anyone can raise their credit score to "Excellent". This is because credit scores are based on a formula and parts of the formula are well-documented and described.
Want to have a higher credit score? Read on.
There are tens of credit reporting companies. However, in the mortgage world, there are three companies which matter most -- Equifax, Experian and TransUnion.
Collectively, these three firms are known as the "major credit bureaus".
Each of the bureaus sells more than one "credit score" product and, for consumers on their respective websites, it can be a challenge to know exactly which "score" to review.
For persons about to buy a home, the relevant scoring system, by bureau, is as follows:
These are the relevant scoring systems because, when a mortgage lender "pulls your credit", it's pulling your scores for these particular products. Your lender then takes the median of the three scores (i.e. the one in the middle), and calls it your credit score.
For example, if your credit scores are 620,640 and 700, your "score" is 640. As another example, if your credit scores are 700, 719 and 720, your credit score is 719. Credit scores are not rounded up or averaged.
Additionally, on a joint mortgage application, lenders will use the lower of the two middle credit scores, regardless of which borrower is the "primary wage earner"; or, whether it's a mortgage with a co-signer.
Generically, credit scores are called "FICO scores", named after the Fair Isaac Co., a pioneer in the credit scoring space. The higher your FICO, the better your mortgage terms, all else equal.
When a credit bureau prints your credit score, in addition to providing your raw scores, it will typically offer up to four ways by which you can raise your credit score.
The notes can be helpful, ranging from the general ("Balances too high") to the specific ("Too many inquiries"). The notes can serve as a roadmap toward improving your FICO.
It's not uncommon for a person to improve their FICO score by 100 points or more with attention to credit-scoring details.
But, for all of the available advice, there are only a few fool-proof ways to make drastic improvements to your credit score.
Of particular note is your "Amount Owed", highlighted in the second point above.
Ideally, a credit card balance should not exceed 30 percent of that card's available balance. This credit score metric comprises thirty percent of your overall score so, if you're unable to pay down your debts, consider asking your credit card company to raise your total credit limit.
Raising your limits can be as effective in raising your FICO as paying down your existing balances.
Lastly, if you've had a derogatory event on your credit report, avoid credit repair companies until you've done your due diligence. Time is often the best healer of a "bad credit report" -- sometimes, much better than settling with a debt collector.
Accessing your credit scores can be expensive. Thankfully, there's a way to get them for free -- all you have to do is ask a lender. As part of the "rate quote process", most lenders will offer to check your credit scores will then forward along your live credit report.
It can be a terrific way to get access to your credit report without having to pay. You'll also know for what mortgage rates you may qualify (and today's mortgage rates are ultra-low).
Get a rate quote now. Access to rates is free and no-obligation. And don't forget your credit score!
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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