Tips In Improving Your Credit Scores

Your credit payment history and credit scores are one of the most important factors that mortgage lenders take into consideration when you apply for a residential mortgage loan.  Your credit scores is what determines whether you qualify for a certain mortgage loan program.  For example, to qualify for a 3.5% down payment FHA insured loan, you need a minimum FICO credit score of 580 FICO.  A 580 FICO will limit your debt to income ratio cap at 43%.  If you have high debt to income ratios, then you need to improve your credit scores so you have a minimum of a 620 FICO credit score because the debt to income cap gets increased to 56.9% if your credit scores are over 620 FICO.  To qualify for a conventional loan, the minimum credit score required is 620 FICO.  However, a 620 FICO credit score is considered a super low credit score for conventional mortgage lenders and you may get penalized by getting offered a very high interest rate.  To get the best conventional loan interest rate, a mortgage loan applicant needs a credit score of over 740 FICO.   Any credit score under 740 FICO, the conventional loan applicant will be getting a price adjustment on their interest rate on a conventional loan.  For FHA loans, credit scores are not as important in getting the best rates, however, any FHA mortgage loan applicant with a credit score of 640 FICO will get a higher interest rate than those with a 640 FICO credit score or higher.  Jumbo mortgage loan applicants need credit scores of 740 FICO to qualify for the 10% down payment jumbo mortgage loan program.  HomePath requires a minimum credit score of 660 FICO to qualify for a Fannie Mae HomePath mortgage loan.

How Can I Improve My Credit Scores So I Qualify For A Mortgage?

The great news is that you can improve your credit scores.  Improving and repairing your credit is like planting grass seeds and watching grass grow.  It takes time and patience.  However, it can get done.  It is like losing weight where if you do not work at it diligently, it will not happen but if you work at it religiously, you will lose weight over time.  Same with credit repair.  You will improve your credit scores if you discipline yourself by making sure that you make your minimum monthly payments on time.

Steps On How To Improve Your Credit Scores

There are three giant credit reporting agencies:  Transunion, Experian, and Equifax.  These three giant credit bureaus are not perfect and they do make mistakes:  tons of mistakes.  The first step you need to take is to review your credit report from the three giant credit bureaus. You are entitle to a free credit report from each one of the three credit reporting agencies.  You can visit www.annualcreditreport.com and request a free credit report every year.  Once you get your credit reports,  go over each line item by line item and check for errors.  Make sure that all of the credit line items that is being reported is yours and look for any late payment history, collection accounts, public records, and balances posted by your creditors.   The information that is on your credit report is the data that is used to derive to your credit scores so if there are mistakes posted on your credit report, it will yield a lower credit score.  If there are any misinformation posted on your credit report, you need to dispute that particular item and send a dispute letter along with any documentation that you may have to prove to the credit bureaus that they have made a mistake.  By law, they have 30 days to contact the creditor that is reporting you negatively on the credit bureaus and that credit needs to provide proof and validate what they are reporting.  If the creditor does not provide proof in 30 days or does not respond to the credit bureaus, the credit bureaus need to delete the negative item from your credit report.

Late Payments And Your Credit Scores

You should religiously pay all of your minimum credit payments on time.  One late payment will not only drop your credit scores by 50 or more FICO points but will be reflected on your credit report for 7 years.  You will always have that late payment history on your credit report.  Your payment history record will comprise of 35% of your credit score calculation. A late payment is not the end of the world but it will drastically drop your credit scores initially.  As time passes, the late payment will have less and less impact on your credit score.  However, it does take time.  Its like recovering from a major hangover.

Do Not Pay Old Dormant Collection Accounts

Paying off an old collection account should not be done.  By paying off an old collection account, what you are doing is re-activating the dormant collection account and re-starting the clock on the statute of limitations.  I have seen mortgage loan applicant’s credit scores drop over 70 points by paying off an old collection account.  My client did not need to pay off the old collection account but she, in good faith, thought that was the right thing to do.  Unfortunately, it back fired on her and her credit scores plummetted where we now have to wait a few months to recover from that negative impact.  The older an unsatisfied collection account is, the less of an impact it has on one’s credit scores.  Mortgage lenders do not require you to pay off older collection accounts unless the mortgage lender has their own lender overlays which require that collection accounts be paid off.  In the event if the mortgage lender that you choose requires a collection account to be paid off for you to get a mortgage loan approval, then see if you can make a deal with the collection agency where you do a pay for delete.  What this means is that in lieu of you paying off the old collection account, the collection agency needs to remove the derogatory collection credit item off your credit report.  Most collection agencies will do this and if you end up with a collection agency that refuses to delete the derogatory credit item off your report in lieu of your payment in full, then ask to speak to a supervisor.

High Credit Card Balances Will Lower Your Credit Scores

Your credit scores will fluctuate from month to month depending on how much credit balance you have on your credit cards and revolving accounts.  The lower your credit balance, the higher your credit scores.  If you have a $1,000 credit limit credit card and your balance is $990, your credit scores will definitely be low.  By paying off your balance or by having at least a 20% credit card balance of your credit limit, this will optimize your credit scores.  The available credit on your credit cards is a huge factor in optimizing your credit scores.

Never close out an activate credit card account or revolving credit account that you do not use with zero balance.  Part of your credit scores is derived by having a credit history with available credit limit and by closing out an active aged credit account will have a negative impact on your overall credit scores and credit profile.

Do not go and open up multiple new credit accounts in a short period of time.  Opening up one or two new accounts every year is fine but opening up multiple new accounts all at the same time will lower your overall credit history age and can hurt your credit scores.  Remember that a portion of your credit scores comes from the age of credit history.  Common sense is that by opening new accounts, it will lower the aged credit accounts you have.  Again, I strongly recommend opening up new credit accounts but not a dozen of them in one month.  One to two new credit accounts a year will be a great future benefit to your credit profile.

Re-Establishing Credit After Bankruptcy And Foreclosure

If you had a recent bankruptcy or foreclosure, chances are that your credit scores have plummetted.  That is okay and the sudden drop of your credit scores will not be permanent.  Even if you do nothing to re-establish your credit after a bankruptcy or foreclosure, your credit scores will naturally improve over time.  However, if you really want to improve your credit and be able to get a mortgage loan as soon as possible, you need to re-establish your credit as soon as humanly possible.  You want to know on how to improve your credit after a bankruptcy or foreclosure?  Most people just assume that due to their bankruptcy or foreclosure that they will only have to deal with cash and re-establishing credit is out of the question.  This is not correct.  The easiest and fastest way of re-establishing credit after a bankruptcy and/or foreclosure is to get 3 to 5 secured credit cards with at least a $500 credit limit.  Use these cards regularly and never ever miss a payment and pay all of the credit card minimum monthly payments on time.  Even though they are secured credit cards, the credit card provider will report the late payments on the three credit reporting agencies and it will hurt your credit scores.  Negative reported items and payment histories from creditors, even secured credit card companies, are on your credit report for 7 years.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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