Credit Tips That Will Score Lower Interest Rates

A good credit score translates into lower interest rates for home-shopping borrowers. In a mortgage lender's eyes, the higher your score is, the less risk you are, and the more likely it is you will pay off your debt. For this reason, borrowers with lower scores usually end up paying higher interest rates on their loans.

If this is you, don't panic. There are a number of things you can do to adjust your credit score to receive a favorable review from the underwriter. Here are a few suggestions:

Should I pay off all my past due balances and charge-offs?

This is usually a good idea, but you only need to worry about the past due balances and charge-offs that have occurred in the last two years. Items more than two years old have little effect on your current credit score. In fact, if you pay off delinquent items over two years old, it can actually bring your credit score down - something you don't want to do. Bringing that score up means you'll get a better interest rate on your loan.

Should I close existing credit card accounts that I don't use?

No. Part of your credit score is based upon credit history. If you have old credit cards that you don't use very much, you still have the benefit of the credit history they represent.

Rather than trying to pay off all your credit cards, you can move part of the debt from one card to another to even out the distribution of debt. Try to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when trying to purchase a home. Also, if your credit provider will increase your line of credit, the ratio of debt to available credit is automatically reduced.

When married couples have separate credit card accounts, the debt can be transferred from one spouse to another to clear up credit issues for the other spouse. That spouse with clean credit can be designated as the sole borrower on the loan, but ownership of the home can still go in both names.

What about errors on my credit report?

If you have items that are showing up on your credit report that you know you have already paid, request that these items be removed by the credit bureau. They are obligated to rectify this within 30 days.

If there are items on your credit report that are less than two years old, send in your payment if possible and mark the back of the check with the following notation: "Accepting this check is evidence that the transaction is complete and this charge will be deleted from my credit record." If necessary, the cancelled check will be proof that this should be promptly removed from your credit report if it interferes with the closing of your loan.

Call me directly for a free consultation.


Superior Home Mortgage Corp. licensed in DE, FL, GA: Georgia Residential Mortgage Licensee #14511, MD, MI, NY: Licensed Mortgage Banker - NY State Banking Department, NC, PA, SC, VA: Virginia State Corporation Commission License # MLB-566, & DC. Superior Mortgage Corp. licensed in CT, MA: Mortgage Lender License # MC3208, NJ: Licensed Mortgage Banker - NJ Department of Banking, RI: Rhode Island Licensed Lender & Broker, & TN. SHM Mortgage Licensed by the New Hampshire Banking Department

4 comments • Karl Peidl - Accredited Loan Consultant • February 12 2009 09:38AM

Credit Scores: When Good is not Good Enough

In the past, a consumer with a FICO score of 620 was considered to be a low-risk borrower by Fannie Mae and Freddie Mac. Not anymore. After suffering major losses in the mortgage market last year, the nation's two largest mortgage finance lenders have redefined risk, announcing new Loan-Level Price Adjustments (LLPAs) for borrowers with FICO scores below 720.

LLPAs are automatic, cumulative fees based on credit scores and the loan-to-value, and they can significantly increase the cost of credit. These fees have nothing to do with your mortgage company or its various products and cannot be negotiated away.

Let's take a look at the impact that LLPA's have on conforming loans.

 


*Based on a loan amount of $300,000 and a loan-to-value over 70%. This chart is meant to be a guide. Interest rates and loan programs are subject to change. Adjustment to fees will be higher for cash-out refinance transactions.

As you can see, borrowers who have FICO scores below 720 will now be forced to pay more, either in points (as much as 2.75% more) or in interest rate. Borrowers with FICO scores below 620 will incur the maximum adjustment which, on a $300,000 loan, would amount to $8,250 in upfront costs.

For borrowers who can't or don't want to pay the cash up front, be aware that lenders have the option of converting these fees into higher rates. In the above example, a 2.75-point fee (2.75% of the loan amount ) is charged to the borrower. The charge could be waived, however, in exchange for increasing the interest rate by almost one full percentage point. The end result would be an increase of nearly $6,200 in mortgage payments over the course of the first three years of the loan, which translates into approximately $170 more per month.

According to Fannie Mae and Freddie Mac, the FICO credit score used to determine the fees for single borrowers is the median or "middle" score generated by the three national credit bureaus. For multiple borrowers, the median score of the borrower that earns the highest income is used. In addition, requirements will vary based on the loan program and loan-to-value. For those borrowing more than 70% of the home's value, for example, credit scores must be 720 or more in order to avoid being subject to the adjustments.

If you are thinking about getting a mortgage in the next 12 months, your credit score is going to be more important than ever. Call your mortgage professional right away to find out where you stand. In some cases, professional credit repair may be required, which could take up to six months or more to achieve the most effective results.

Stay tuned for more great credit tips!


Licensed Mortgage Banker, NJ Deptartment of Banking and Insurance. Corporation also services CO, CT, DE, FL, GA, IN, MA, MD, MN, MI, NC, NH, NY, PA, SC, TN, VA, & RI.


2 comments • Karl Peidl - Accredited Loan Consultant • October 16 2008 10:52AM

Score: What is it Good For?


The Elements of a Credit Score

(click here to watch a video)

A credit score is an extremely important financial tool. It provides access to the financing you need in order to buy a car, a home, or pay for college tuition, among other things. Since higher scores equate to lower costs and vice versa, it's vital to understand the factors involved in calculating your score. Here are the five elements that make up a credit score, in order of importance:

Payment History: 35% impact. Paying debt on time has a positive impact. Late payments, judgments, and charge-offs have a negative impact. Delinquencies that have occurred in the last two years carry more weight than older items.

When applying for a mortgage, every point in your credit score can make a big difference. So don't make any major financial or credit decisions - even paying off an old debt or delinquency - without first discussing it with your mortgage professional.

Outstanding Credit Balances: 30% impact. This factor marks the ratio between the outstanding balance and available credit. Ideally, consumers should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when planning to enter into a loan transaction within 3-6 months.

Credit History: 15% impact. This marks the length of time since a particular credit line was established. A seasoned borrower is stronger in this area.

Type of Credit: 10% impact. A mix of auto loans, credit cards, and mortgages is more positive than a concentration of debt from credit cards alone.

Inquiries: 10% impact. This quantifies the number of inquiries (or requests for credit) that have been made on a consumer's credit history within a 6-12 month period. Each individual inquiry - up to 10 - can hurt your credit score by as much as 5 to 30 points. Any additional inquiries thereafter will not affect your credit score.

In other words, don't start the loan process until you're ready to act. Otherwise each individual credit inquiry could cost you. However, scoring models have now been adjusted to count multiple "hard" inquiries within a 14-day period as a single request. So, when you're ready, your credit will be too.

If you or anyone you know has any questions about credit scores or what can be done to repair them, please don't hesitate to call.


Licensed Mortgage Banker, NJ Deptartment of Banking and Insurance. Corporation also services CO, CT, DE, FL, GA, IN, MA, MD, MN, MI, NC, NH, NY, PA, SC, TN, VA, & RI.

 
0 comments • Karl Peidl - Accredited Loan Consultant • October 09 2008 02:07PM