The first item any lender looks at when considering a mortgage application is the borrower's credit report and FICO score. Along with income and employment, a borrower's credit rating determines not only their eligibility for financing, but the cost and available terms of the loan. A credit score dip of just one point can cancel a loan or result in higher closing costs or mortgage rates. Case in point: I am currently refinancing a $600,000 mortgage for extremely well-credentialed borrowers (great income, savings, solid appraisal, etc.). And while their credit mid-score of 739 is still considered very good, it is just shy of the preferred 740 mark. When factored in with loan type and the loan-to-value ratio, there is an investor (Fannie Mae) cost of .375 percent of the loan amount, or $2250. This sum must be covered through either increased closing costs or a slight increase in interest rate. (Fortunately, we've figured out a way to improve their credit scores.)
lenders generally use tri-merged credit reports pulled through Experian,
Equifax, and Trans Union, and use the lowest mid-score of either borrower as
the qualifying number. These mortgage rated credit reports typically show lower
scores than reports offered to the public, and they are far more detailed with
respect to a person's residential, employment, and credit inquiry history.
Things You Should Do To Maintain A Good Credit Rating
Make Your Payments On Time
The best way to improve or maintain good credit is to pay your bills on time. A history of late payments, even for small balances, can destroy your credit rating. One common issue on credit reports is medical related collections for ambulance rides or doctor's office visits. These often result from misdirected invoices or mix-ups with insurance coverage and billing.
Avoid Maxing Out Credit Card Balances
Keep credit balances significantly lower than your credit limit. There is no specific rule as to what the highest percentage is without hurting scores, but if you keep balances to no more than 33% of the available card balance, you should be in good shape. Above this percentage, the more leveraged you are, the more your scores are being compromised -even if you make all minimum payments.
Mix It Up
Having different types of credit, such as credit cards, department store cards, and installment loans for items like car loans, improves your credit score. A credit history that demonstrates your ability to manage different types of credit and to make timely payments for all will serve to improve your credit scores.
Keep An Eye On Your Scores
Check your credit report annually. Per consumer advocacy group studies, up to one out of every four credit reports contains a serious error that could hinder your chance of getting the best terms on a loan. You are entitled to one free credit report annually from each credit repository.
You can access your free annual credit report at: https://www.annualcreditreport.com/cra/index.jsp
Promptly Correct Any Errors You See On Your Report
If you find an error that you can dispute it by going to each individual repositories dispute website:
Pay All Parking And Speeding Tickets
Citations are considered debts and government entities are turning these uncollected fees to collections agencies who report to the credit bureaus. Any such posting will have a negative affect on your credit rating.
Develop A Credit History
If you don't have a credit card, get one and use it responsibly so credit bureaus can begin to track your payment history. Simply charging $20 a month and paying it off each month over six to eight months will help establish good credit. If you have cards but have not been regularly using them, they will be tagged as "inactive" and do nothing to support your scores.
Fill Out Moving Forms
Whenever you move you should report your change of address to the United States Postal Service to avoid missing important mailings like credit card and utility bills. The last thing you want to do is miss or fall behind on payments because that will be reported to the credit bureaus. More than a few of my clients thought they'd taken care of all bills only to discover collections posted on their credit report due to minor amounts still due to entities like the phone company.
Things You Should Avoid To Keep Your Credit In Good Standing
Closing Credit Accounts
Although it seems counterintuitive, paying off and closing a credit card generally lowers your scores for several months. If you think you may need access to a loan in the near future, avoid paying off and closing accounts. When you close a card the amount of credit you have access to is reduced. This makes any outstanding debt higher in proportion to your available credit. Additionally, long-held accounts improve credit scores because they demonstrate an ability to manage credit over time. A card that you've held for a few years is better for your score than one you've just obtained.
Opening Too Many Accounts
Opening several new accounts over a short period of time will lower the age average of your accounts. In addition, multiple inquiries will be listed on your credit report. Both have a negative effect on your score in the short run. Be wary when considering the benefit of a retailer's 10% discount special in exchange for opening a credit card account.
Limit The Amount Of Time Spent Shopping For A Loan
Whenever you approach a lender for a loan they will typically run a credit report, which generates an inquiry on your report. Having numerous mortgage inquiries over a 30-day period is generally OK. But if inquiries are prolonged over several months your scores will begin to suffer. (You will also need to explain each inquiry to the eventual lender you decide to work with.) Try to determine which lender you wish to work with within a few weeks.
Having A Friend Or Relative Check Your Scores
Asking a friend or relative to check your credit score may seem reasonable and harmless, but it's an inquiry nonetheless. If you instead look up your own score the credit bureaus will consider it a soft inquiry with no negative consequence.
Avoiding All Credit
I'm occasionally told by clients that they have no debts or credit cards as they prefer to pay with cash. Unfortunately, lenders want assurances that you already have access to credit as well as a good history of repayment of debt. This is especially so for mortgage financing.
Making Only Minimum Payments On Credit Card Balances
Making only a minimum payment on a credit card can be misinterpreted as your being over your head. This is particularly true if your cards are highly leveraged. If possible, try to pay above the minimum amounts showing on your monthly bills.
Avoid Paying Less Than The Amount Owed
If you are having trouble making payments on a debt, you may be tempted by a creditor's offer to settle at a reduced amount. Unfortunately, the creditor will generally report the unpaid amount as a charge off. Your debt may be settled, but the impact on your credit report will persist.