Delavan Real Estate & Mortgage Blog

As a general rule, a person with a low credit score is in this situation because they lack organizational skills in their life. There are, of course, cases where unplanned health or employment complications arise, but for the most part, these are individuals who lack the discipline to pay their bills on time or limit their spending.   I’m certainly not passing judgment, these are general rules not all cases fit into these.

Let’s take a look at some examples that can help to quickly improve less-than-perfect credit scores for the potential homebuyer in Delavan, Lake Geneva, Elkhorn, or anywhere in Walworth County, Wisconsin:

Let’s say you have a credit score of 664.  You have a concentration of credit card debt on one card; let’s say $7,000 on a card with a $10,000 limit.  At the same time, you have four or five additional credit cards, all with a zero balance.  I would advise you to distribute the debt over a number of your cards.  Remember, your credit to debt ratio represents 30% of the overall score.  By simply changing the ratio of available credit to debt, in this example you could possibly increase your credit score to something closer to 700, saving thousands of dollars on a mortgage.

Another thing to take into consideration in a case like this is what percentage each of the five factors measure in the resulting credit score.  Let’s say you have a “credit high” (the maximum debt allowance on all cards, combined) of $20,000.  You have one card that is used for business purposes that is pushing the limit.  I would advise you to get two new cards and, once again, spread the debt out over all of your cards, leaving at least 30% available credit on each card.  This will positively affect the overall score, based on the five elements of the FICO scoring model.

Conversely, you should be advised not to close any existing credit card accounts, even if they are at a zero balance. Some people think they are doing themselves a favor by having fewer cards, but they lose out on the credit history factor.  Even if you don’t have a good rate on an old credit card, they are rewarded for having the long-term credit history, and from time to time they should make a small purchase to keep the account in an active status.

These are just a few examples of what you can do to improve your credit scores when you consider buying a home.  If you are disappointed by the fact that you can’t get the most desirable loan up front, I will continue to monitor rates and your specific loan scenarios on an ongoing basis and advise you when you will have a chance to turn this situation around.  The new mortgage debt will temporarily drop the score, but once the first payment registers as “paid,” the score will begin to go up again and eventually present the opportunity to refinance at a lower rate.

There are five main factors that encompass the credit score. They are listed below in order of importance:

• • Payment History: 35% impact. Paying debt on time and in full has a positive impact. Late payments, judgments and charge-offs have a negative impact. Missing a high payment has a more severe impact than missing a low payment. Delinquencies that have occurred in the last two years have more impact than older items.

  • Outstanding Credit Balances: 30% impact. This factor marks the ratio between the outstanding balance and available credit. It compares both, total aggregate credit available and individual credit lines as well. Ideally, the consumer should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when trying to purchase a home.

  • 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. The credit scoring models prefer you have a trade line for at least two years.

  • 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 only.

  • Inquiries: 10% impact. This quantifies the number of inquiries that have been made on a consumer’s credit history within a six-month period. Each hard inquiry can cost from 2 to 50 points on a credit score, but the maximum number of inquiries that will reduce the score is 10. In other words, 11 or more inquiries in a six-month period will have no further impact on the borrower’s credit score. Please be aware that all inquiries for mortgage pulled within a 45 day period will only impact your score one time. That’s why it still makes sense to call Travis Egan, Delavan Mortgage Planner, for a second opinion on your home loan. (262) 745-5055

Remember, a computer that’s not taking any personal factors into consideration calculates these scores. When a credit report is generated, it is simply today’s snapshot, similar to a Polaroid, of the borrower’s credit profile. This can fluctuate significantly within the course of a week, depending on the individual’s own behavior. You should be aware of this when you enter into the loan process, and know that it’s not in your best interest to go out on a shopping spree. You need to make sure you’re not creating a negative impact on the score while your mortgage planner is reviewing your file.

Secondly, it is often beneficial to compile a tri-merge credit report. This provides scores from the three credit bureaus, Experian®, TransUnion®, and Equifax. The mortgage planner should be provided with this rounded profile because these three scoring systems can vary in their results. The mortgage planner is going to look at the middle score and discard the other two. In many cases, this works to the borrower’s advantage.

Sometime in the 1960’s Fair Isaac Corporation started working on a system banks and lenders could use to evaluate the likelihood of receiving repayment on loans of all types.  Prior to that, it was really a matter of trusting an individual to be a “man of his word,” so to speak and relying on the lender to approximate whether they were likely to do so.  Fair Isaac sought to take human error out of the equation with a reliable system that could determine whether or not consumers were truly worthy of credit, and thus FICO was born.  This evolved to become that standard for lenders by the 1980’s. 

Credit scoring has an enormous impact on a borrower’s ability to purchase a home, car, or any other large purchase.  It can mean the difference between getting a good interest rate and the home of your dreams, or whether you even qualify at all.  For this reason, it is important for you to understand the credit scoring process, and to know what your credit score is when they look to obtain any type of financing, but most importantly home mortgage financing.

What the credit scoring model seeks to quantify is how likely you are to pay off the debt without being more than 90 days late on a payment at any time in the future.  Credit scores can range between a low score of 350 and a high of 850.  The higher your credit score is, the less likely you are to default on the loan.  Only a rare one out of approximately 1300 people in the United States has a credit score above 800.  These clients almost always walk away with the best interest rates.  On the other hand, one out of eight prospective home buyers are faced with the possibility that they may not qualify for the loan they want because they have a credit score between 500 and 600. 

There’s more to this story stay tuned… 

If you have questions about credit scoring and what it means to your home purchase I encourage you to call Travis Egan, Walworth County’s premier home loan advisor.  I specialize in helping buyers and sellers get the absolute best financing in areas like Delavan, Lake Geneva, Elkhorn, and all parts in between.  It is my objective to do such a great job for you that you gladly want to refer your friends, family, coworkers, pretty much anyone you know to me and my services.  Let me assist you putting to together a mortgage plan that encompasses all your short and long term financial goals.