How Credit Scores Impact Mortgage Loans

Credit Scores Impact Mortgage Loans

Are you working towards financing a home? You probably know how your credit rating will impact your loan qualification. You pretty much need the minimum credit rating for FHA home loans, which is a 580 FICO score. If you cannot qualify for FHA insurance, you will be hard-pressed to find any lender until you fix your credit.

There are many implications that your credit rating can have on your prospective home loan, such as whether you actually qualify for the mortgage, how low of an interest rate you will get and what type of lender will work with you.
Now, there’s also an unspoken factor: how much your mortgage will cost in total.

How Your Mortgage Could Cost More

When you apply for home financing with a bad credit score, it is unlikely that a major bank will approve you. Since it is the major banks that get the best borrowing rates in the first place, your alternatives will be more costly. In the worst case scenario, only a private lender would consider you.

You might be somewhere in the middle and can get a home loan through a financial institution that accommodates bad credit borrowers. There are many reputable lenders in this area, but you still face the issue of a higher interest rate. This is because the banks know you are a higher risk.

Tip: Get your mortgage through a highly legitimate financial institute that works with bad credit borrowers while also offering traditional home loans. That way, you can repair your credit while holding the costlier loan and refinance under the same lender after your credit score improves.

Your credit score does not have to hold you back from a mortgage. You just need to make sure it’s not unexpectedly costing you extra.

What Will Your Credit Score Cost You?

When applying for a home loan, your decided interest rate is mainly calculated based on your credit score. So if you were to apply for a mortgage right now, what would this mean to you?

It all depends on where you live …

Let’s use Manhattan, New York as an example, seeing as how even a one-bedroom will easily set you back $400,000 or more.

Say you are buying an apartment for $400,000 and you give the minimum of 10 percent down. This leaves you with a $360,000 principal to finance through a mortgage provider. Let’s say the mortgage will run for 30 years and it’s a fixed-rate loan.

Below shows your total interest cost for the lifetime of the mortgage. These calculations come from MyFICO.com’s Loan Savings Calculator, which estimates your interest rate based on your FICO score range.

  • 620 to 639 FICO score: $319,418 total interest (4.793% APR)
  • 640 to 659 FICO score: $277,706 total interest (4.252% APR)
  • 660 to 679 FICO score: $245,727 total interest (3.825% APR)
  • 680 to 699 FICO score: $230,167 total interest (3.613% APR)
  • 700 to 759 FICO score: $217,414 total interest (3.437% APR)
  • 760 to 850 FICO score: $201,683 total interest (3.217% APR)

To put it into context, you are looking at saving $117,735 over 30 years by financing with perfect credit instead of below-average credit. From another perspective: your monthly payment will be about $327 less!

How to Make Your Mortgage Cost Less

There are some tricks that can help you qualify for a more affordable mortgage. Four simple ways to do this include:

1. Refinance Your Mortgage After You Buy

Your mortgage payments go through on time for half a decade, and suddenly the huge debt does not keep your credit score suppressed. The result could be seeing your credit rating go up by a considerable amount since when you first qualified for the mortgage. If this is the case, you could refinance the mortgage to lower your interest rate and ultimately make the rest of the mortgage term cheaper for you.

2. Rent-to-Own the Place First

If you are repairing your credit, but you want your new home now, you could try to buy through a rent-to-own agreement. You will be able to guarantee the seller gets the asking price as long as you follow through with financing at the end of the term. While the rent-to-own contract will set you back a little in equity, the much lower interest rate will create much more savings.

3. Wait a Little Before Buying

While this is not the most exciting solution, sometimes it makes a lot of sense. Say you have a bad debt in collections from six years ago. If that’s the case, waiting roughly a year will cause the negative item to leave your credit report and thus it will not hold back your FICO score. The end result could be a huge boost in your credit rating, or at least enough to score you a better interest rate.

4. Purchase Under Owner Financing

If you want your new home now, but rent-to-own will not work, you might be able to purchase via owner financing. This means the seller holds the mortgage for you for so long (usually 1 to 3 years), and then you can get your mortgage and make a balloon payment to buy it out. You can use the in-between time to repair your credit and this will help you secure a good interest rate. In the meantime, you will be paying on the home under the current mortgage conditions and your bad credit status will not cost you more.

Owner financing is really the only cost-effective and sound way to approach buying a home with bad credit. Otherwise, you could be throwing well over $100,000 out the window. That’s a lot of extra money to pay, especially if you are actually eyeing a one-bedroom apartment.

To conclude, get your credit repaired before applying for a mortgage because the cost of doing so is minuscule in comparison to what you will save on interest payments.

Sources:

  • http://www.fha.com/fha_credit_requirements
  • http://www.myfico.com/crediteducation/calculators/loanrates.aspx
  • http://www.investopedia.com/articles/mortgages-real-estate/10/should-you-use-seller-financing.asp

How Can I Improve My Credit Score?

fix your credit

Your credit score isn’t a mysterious number. You have direct control over every single point. Some improvements will take longer than others, but there are a number of steps you can take to improve your credit score both immediately and in the future.

1. Order a Credit Report

You may receive a monthly credit score from a credit card company or get your score in a letter when you’re denied for credit, but your score doesn’t tell the whole story. You need to see your full credit report to understand exactly what’s impacting your score.

Things you’re looking for include total number of accounts, account balances, payment history, credit inquiries and negative items such as collection reports. Once you understand what’s reported on your credit report, you can begin your plan of attack.

2. Dispute Negative Items

Depending on your starting credit score, one negative item, such as a late payment or charged-off account, can drop your score 100 points or more. If you successfully dispute a negative item, your credit score will bounce right back up to where it was.

To win a dispute, the information on your credit report has to be either inaccurate or without adequate supporting documentation. Some common items to consider disputing include the following:

  • Negative remarks that have the wrong date.
  • Collections or charge-offs that were added back to your credit report after a bankruptcy or settlement.
  • Accounts where you don’t recognize the lender or collection agency.

When you file a dispute, the lender or collection agency is required by law to show proof that the information is accurate. If they can’t do so, the negative item must be removed.

3. Stop Applying for New Credit

When trying to repair your credit, think like a doctor — first, do no harm. Every time you apply for new credit, your score for recent inquiries goes down whether or not you are approved. If you are approved, your average age of accounts also goes down because of the new account.

Recent inquiries and age of accounts add up to about 25 percent of your total credit score. That leaves a lot of room for improvement just by pressing the pause button.

4. Look Into Credit Limit Increases

The only possible new credit you should consider is a credit limit increase on existing credit card accounts. The amount you owe in relation to your available credit makes up 30 percent of your credit score. One or more maxed-out credit cards can tank your score.

The reason to look at credit limit increases but not other forms of new credit is that credit limit increases usually don’t have a negative impact. An increase doesn’t open a new account, so your average age of accounts doesn’t go down.

At many banks, a credit limit increase request won’t count as a credit inquiry, either. Look for online offers to increase your credit limit or a credit limit increase request button. Most banks will warn you if they will pull your credit report and make an inquiry. If they do, check your other credit cards for offers that won’t require a pull.

5. Pay Down Your Credit Balances

Generally, a maxed-out card of around 90 percent of the credit limit is terrible, 75 percent is bad, 50 percent is OK, 30 percent is good, and less than 10 percent is excellent. The faster you can get your credit card balances down to these thresholds, the faster your credit score will improve.

Note that even people who have never paid a dime in interest need to watch their credit card balances. Your credit score balance is calculated on the statement date.

If you run up $900 in charges on a card with a $1,000 limit, your credit score will plummet when the monthly statement is issued. The good news is that if you pay the balance in full by the due date, your credit card will go right back up when the next statement shows a $0 balance.

6. Use Your Credit Cards

Always having a $0 balance on your credit cards is actually worse than having a small balance. The reason is if you aren’t using your credit cards, the credit scoring model doesn’t know what you’ll do if you suddenly start using them. Always try to use your credit cards for at least one charge each month.

Some people mistakenly believe this means you have to pay interest to have a good credit score. You don’t. When you have a small balance on your credit card statement, you can still pay in full each month (before any interest accrues) and have an excellent credit score.

7. Set Up Automatic Payments

Late payments do a lot of harm to your credit score, but it’s easy to simply forget about a bill. To make sure this doesn’t happen, put each of your credit cards, loans and other monthly bills on auto pay.

If you’re worried about being able to pay in full each month, set up automatic minimum payments, and then pay the rest when you can. Payments are considered on time as long as you pay the minimum amount due.

Sources:

http://www.myfico.com/crediteducation/improveyourscore.aspx

http://www.bankrate.com/finance/debt/7-simple-ways-improve-credit-score-1.aspx

http://www.experian.com/blogs/ask-experian/credit-education/score-basics/improve-credit-score/

https://www.creditsesame.com/blog/improve-your-credit-score/

http://money.usnews.com/money/personal-finance/articles/2015/06/23/10-simple-ways-to-raise-your-credit-score

https://www.bankofamerica.com/credit-cards/education/how-to-improve-your-credit-score.go

http://abcnews.go.com/Business/perfectly-legal-hacks-improve-credit-score/story?id=23071180

http://www.myfico.com/crediteducation/whatsinyourscore.aspx

 

Choosing the Right Credit Card for You

Choose credit cards

There are dozens of credit cards on the market, so choosing the right one may be difficult. Do you want a card that gives you airline miles, or would you prefer cash back when you shop for groceries or buy gas? The options are almost limitless, so be sure to get a card that suits your needs. Credit comparison sites such as CardRatings can help you choose a card that’s right for you.

Cards and Your Credit Score

One of the most important things to keep in mind before you get a credit card is how it will affect your credit score. Also, depending on your credit score, you may not qualify for every card out there. Always keep in mind that credit cards report to the credit bureaus, so if you don’t pay your bills on time, it will negatively impact your credit score.

Types of Credit Cards

According to the American Bankers Association, 83 percent of people with a credit card have at least one rewards card. Why are they so popular? People like getting rewards for purchases they’re making anyway. You can earn free hotel stays and airline miles just for using the right card.

Here are a few types of credit cards that you may want to consider:

  • Cash-Back Rewards – As the name suggests, you earn cash back each time you make a purchase. These are growing in popularity, and there are a lot of options out there. Some flat-rate cards will give you 1.5 percent cash back on all purchases, while others offer accelerated cash back earnings in certain categories. If you like cash back, look for a card that offers generous rewards and bonuses in categories that you spend more on, such as gas or restaurant purchases.
  • Co-Branded Cards – These are often called partner cards and give you extra rewards at a retailer that you frequent while giving you rewards on all other purchases. These are great if you frequent a particular retailer.
  • Secured Cards – Secured cards are a bit different and are generally used to help people establish or fix their credit score. The idea is simple: You deposit money in a savings account at a bank, and the bank gives you a credit line up to that amount. Secured cards offer a couple of advantages. First, the money that you put in your savings account stays there. Secured cards aren’t debit cards. Second, secured cards report to the credit bureaus, which can help improve your credit score if you pay your bills on time. A credit repair service may recommend that you get a secured credit card to reestablish your credit.

Words to the Wise

A few years ago, a survey found that as much as $16 billion in rewards go unredeemed every year. Make sure that you take advantage of the rewards you earn. You should also review your monthly statements and take advantage of bonuses that card issuers sometimes offer. Also remember that miles and points may expire. Don’t let your hard-earned miles go to waste.

Read the fine print. Some credit cards require that you register for revolving rewards every quarter, while other cards place restrictions on the miles that you can use. Before applying for a credit card, make sure that you’ve read the fine print and get a card that matches your spending habits and lifestyle.

Lastly, watch out for fees. Check the benefits and rewards that a card offers and determine whether they’re worth the amount of the annual fee. Also look out for other fees, such as foreign transaction fees if you travel overseas.

Credit cards can be a great way to improve your credit score while being rewarded for purchases. The best advice is to read the fine print on the card that you’re looking at and use the card wisely to maintain a good credit score.