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Credit scores and Mortgage Programs

Location: Cornerstone Lending Inc, 720 Second St Pike suite 104, Southampton, PA 18966
Author: Alan Openshaw

For whatever reason the last month, all my recent clients have come to me with preconceived notions of how to best prepare themselves and their credit score for an upcoming mortgage and home purchase. This information is gleaned from various sources and Credit Karma is just one of those. So now its time to set the record straight.

The first question I have is what is the score, and what does it need to be? There are 4 things that will determine your interest rate and cost for that rate.
1. The mortgage Program.
2. The loan to value ( that depends on the amount of funds you have for down payment)
3. The credit score
4. The mortgage lender. All lenders are not the same.

The mortgage program is the most important. For example. On a conventional loan putting 10% down, the interest rate, or cost for that rate will get worse for every 20 points that your credit score is below 740. Also, the mortgage insurance cost will increase for every 20 point increment drop in credit score starting at 760. However, on an FHA loan, the mortgage insurance cost does not change based on credit score and you only get a minimal benefit of having an 800 credit score over a 680 credit score. So, knowing where the credit score needs to be to increase your benefit is paramount. A person with a 680 credit score that is going FHA has no need to try to fix the 4 year old medical collections on their credit score.

On the other hand, there are other government programs which, if the client is under a certain income level or buying in certain areas, that allow 3% down with no mortgage insurance and no rate or pricing hits. So knowing the program that we are shooting for is paramount to whether we need to fix credit or not. If credit score is an issue, there are often simple steps to improving the score. Don’t think your score is going to jump if you pay off that 5yr car loan in three years. It doesn’t matter. However, if the car loan has less than 10 months payment or less, we can ignore that liability and lower your debt to income so that you can qualify for a larger mortgage if needed.
Don’t think paying off or disputing that 4yr old medical collection is going to help; it may actually hurt you. When a tradeline is disputed it is ignored in calculating the credit score. All disputes must be removed from the credit report prior to closing so that the score accurately reflects your true credit history. On FHA loans, non-medical collections over $1,000 must be paid at settlement, but this is not the case on conventional loans. Two things to note here. Clearly knowing the mortgage program that we are striving for is important. However just because Fannie Mae does not require collections to be paid, it does not mean that every lender will follow that rule, so knowing your mortgage lender’s rules here maybe important too!

So how do we increase the score? When I look at a credit report, I look for the obvious fixes.
If you have reached the balance limit on your credit card, the lender will report that balance, with interest and show you as over the limit. That is probably hurting your score by about 30 to 40 points.So if two cards are over the limit, that may be the difference between a 680 and a 760 credit score.If we are looking to put 10% down with a 680 credit score and you have some hefty credit card debt, it may make sense to put less money down and pay down those credit cards prior to applying for a mortgage. Again, only a mortgage professional can guide you on this because they will know what program we are striving for and how best to position you for the best mortgage.
Most lenders now have a “ What If “ simulator. Once we pull credit, we can plug in any scenario into the credit report and get a fairly accurate response as to what will happen to the credit score, if say we pay down debt.

Opening up new accounts will hurt your score in the short term and paying a loan down to zero will have less impact on your credit score than leaving a small balance on the card.
Sometimes it is necessary for me to refer clients to a reputable credit repair company. Just like anything else, some are better than others!

So trying to best position yourself for a mortgage without all the information is basically an impossible task without the help of a Professional. As soon as you are thinking of buying a home, call a reputable Mortgage lender first. Make sure they are experienced. Make sure they have access to all the mortgage Programs Make sure they will take the time to assist you in fixing the credit so when the time comes, you will be well position to get the best deal available.
Last of all. Shop price and Rates. Although for the most part, we all get money from the same places, some Lenders have bigger margins than others and that means it will cost you more money!