March 1st, 2012 8:48 AM by Diego Quintero
Article first published as "Improve Credit, Save Money & Open Your Finance Options," on Technorati
One of the first, most important risk factors in approving a home loan is credit scores. With the latest loan guideline changes, brokers and bankers are typically submitting loans with credit scores at or above 640 for FHA and 660 for conventional loans. With a prerequisite of high FICO scores, it makes sense to learn methods of improving your score. Those with higher scores will save more money and have more favorable finance options to choose when buying large ticket items, a new home, or even getting an insurance policy.
High scores are not only a requirement of the bank funding the home loan. In the case where your conventional loans are above 80% of the value of the property, borrowers will need to prove at least 700 credit scores in order to obtain Mortgage Insurance.
If your score is under 700 and you have a small down payment, you will most likely obtain an FHA loan. The only downfall to FHA loan programs is that they are slightly more expensive due to the Up-Front Mortgage Insurance premium (one percent of loan amount due to HUD). Regardless, they are incredibly beneficial to new home buyers & those with less than perfect credit (although, you still need to be a high-scoring 640). The rates are comparable to conventional finance, so while the programs are more forgiving, they are still priced competitively.
What if one of your three scores is above the 640?
The risk assessment is based on the middle of three scores, or the lowest of two, as provided by the credit bureaus. If only one score appears, you will not be approved and need to make some other credit moves and make some calls to ensure that all of the credit bureaus are getting data from your creditors. The three credit bureaus each calculate a score based on the levels of credit, history of payments, history of long standing accounts, etc. Their proprietary method of scoring is just that, private! But as long as you pay your bills on time and in-full, you should score well.
But how can you get an edge on scoring so that you can save thousands of dollars in lower interest rates on car loans, home loans, & insurance costs?
In my experience, “opting out” is usually a good way to start to improve your credit scores. This effectively stops the junk mail from credit card companies and insurance companies selling you on their products. Although there is no guarantee of improved scores from opting out, I have seen 10-15 point increases, within 30-60 days. It is significant enough to be worth thousands of dollars over the life of a loan.
Still seeking to gain an edge on better credit scoring? Generally, the credit bureaus look favorably upon those consumers using 30% or less than their lines of credit allow. For example, if a credit company allows you to borrow $10,000.00 as the maximum balance and you are carrying $3000.00 or less as a revolving balance, it bodes well for your score. What if it’s less? Well, the more credit that you have available, the better! So, don’t close accounts. Keep them open, just manage the paperwork and be well-organized.
Ideally, you will need to have 3-5 lines of credit each with 12 months of history. A line of credit can be a car loan, maybe a credit card, or a student loan. If you want to increase individual lines of credit, just call your creditor and ask for an increase. It may help you decrease your balance to that 30% mark, in case you spent more than the recommended amount. Otherwise, pay them down and show that you are responsible in meeting your obligations.
In the past I have seen 50-60 point swings in credit using these simple procedures. Sometimes it will cost some money to pay down lines of credit, for others, time will be the challenge. There really is no easier way to save money on large ticket items than to ensure that you know how your credit works, be well organized, and educate yourself on the latest tips and tricks.
Need a great starting point before venturing into the home buying arena? Obtain your annual credit report to view the content of your credit history, for free! This source does not give you a free score, but it will give you the ability to view and, if necessary, contact your past creditors. For more information, visit the Federal Trade Commission’s website to learn more. Then, speak to your trusted mortgage broker to find out how you can save money on your mortgage or get approved for a low interest rate on a new home.
Your Trusted Mortgage Broker,
Diego L. Quintero