Thirty Days of Real Estate – Day 5: Credit Score

Real Estate with Dallice – Credit Score and Report

Your Credit Score matters. Every time you pay your Macy’s card late, have a medical bill sent to collections, miss a student loan payment, run the credit card up and not pay it down by the end of the month, get a new loan for a car, house or furniture… it changes your credit report and the Credit Score that people judge you by. No, not nice. But true.

Every time you want to open a new credit card, get a home loan or even apply for a lease or job that requires a background/credit check, the credit score and payment history of your financial life will impact your ability to qualify, or the interest rate/fees that you will be offered. For better or worse!

Don’t close this page. Instead of putting your head in the sand and pretending this does not affect you, let’s address areas where you can improve your credit score and payment history. Because you are not alone. Almost everyone I run into has skeletons in the closet… little tidbits of credit history that they don’t want other people to know about, regrets about spending – or not paying for it in a timely fashion or simply has never known how to use credit effectively to improve their credit score. Everyone has room for improvement.

There is nothing that cannot be overcome in time, with practice and discipline.

• Bankruptcy.
• Foreclosure.
• IRS tax liens.
• Behind on child support.
• Wonky divorce dealings.
• Overwhelming credit card debt.
• Student loans that seem impossible. 
• Late mortgage payment.
• Repossessed car.
• Medical bills gone to collections.
• Borrowed from your retirement account.
• New to the country.
• Someone else’s dependent.

 I have seen it all. Trust me… You are NOT alone and help is available, but be careful who you seek out to help you. Some have their own agenda – carefully masked as “caring and helping”.

Quick side note: I decided to try out Credit Sesame on your behalf. They claim to be able to guide you into a better credit report and higher credit score. And maybe they could… but in my opinion, they DON’T.

After signing up for their free monitoring and service, complete with helpful emails, I was bombarded and harassed with emails that essentially were trying to get me to refi my house with their lender advertisers/partners or open another credit card with their credit card advertisers/partners. All these pictures are screen shots from emails I have received in the first 4 days.

This one really takes the cake! An encouraging email to increase your credit limit and go shopping! Seriously… how can you market yourself as trying to help people improve their credit scores when the very act of applying for a loan or credit card will immediately decrease that score?! What if habitual shopping was the cause of the lowered credit score to start with?

My personal opinion about Credit Sesame and those like it is, they are like if the Salvation Army showing up to feed people after a natural disaster… and they doled out bubble gum instead of real food. At first, it tastes like food and your stomach is tricked into feeling full. But really, the quick sugar rush is followed by a quicker crash and the person is left feeling hungrier than before. Terrible!

The actual truth is that excellent credit CAN often be obtained in less than a year and sometimes a few months is enough to improve it substantially – if you go about it with common sense and avoid offers that are too good to be true;

1. Check your credit report. You are entitled to a free report from each of the 3 major reporting agencies every 12 months. Experian, Equifax, Transunion. Is everything you see accurate?  If not, have it investigated and/or corrected.
2. Be careful with credit cards. Don’t have more than 3, don’t run them up so you have used a high percentage of the available credit. It’s good to stay under 30% of your credit limit, but better to stay under 10%. Yes, it’s OK to ask your credit card company to reduce the limit on your card, especially if that helps your spending habits change for the better. In certain situations it might even be beneficial, short term, to raise the limit on your credit card to alter the ratio. (Don’t do this without consulting your Lender!)
3. Use some credit! It is detrimental to you to have no credit cards or lines of credit (car loan, utility accounts, store credit cards etc). If necessary, apply at your bank for a secured credit card. Even just $200 limit, secured by $200 is going to help. Then use that card every month and pay it off to zero or almost $0 every month. Show the credit reporting agencies that you can responsibly use credit, manage credit and diligently pay off the credit you use. Before long, word gets out and you will be offered more credit cards. Unsecured ones. Be careful and read #2 again please!
4. If you are going to close some lines of credit (for instance because you have 10 credit cards open) then pick carefully the ones to keep. The most valuable to your credit score are those that have been open for the longest time. Also be sensible and assess the interest rate and annual fees that each card costs you, what the rewards are and if they are useful to you.
5. If you have debts/bills that are overdue or at collections, start paying them down. Pick the small ones first and eliminate them. Not by putting them on your new credit card or increasing the balance of you old credit card, ok?

I used these pointers to take my immigrant, divorced and with credit card debt self to “Exceptional Fico Score” status and you can too. Here is the proof: Yes, that as my score at the top… Check out the dates. I gained 35 points in a month as I researched for this post.

And 9 months later… 

How does your Credit Score affect your mortgage application?

I’m no lender but I am a borrower and I work with lenders daily. There are things you should know and this post is a good start. Then you’ll ask me to put you in touch with a trusted loan officer who can educate and guide you according to your specific situation, before you simply pre-qualify to buy a house. 

Some actionable items that help you better qualify for a mortgage:

• The credit card debt brackets at which you see the biggest changes to your ability to borrow, happen at 50%, 33% and then again at 25% of available credit. For instance, you have a $10,000 limit on your credit card and you spend $5500. You now owe more than 50% of the available funds. 

You pay it down below 50% ($501 payment) and your lender feels better about loaning you money. IE: He charges you less or lets you borrow more. If you pay off $2801, the balance is now $3299 and scooting under that 33% benchmark. Even better… you pay off $3100 and your new credit card balance is $2400 or 24% of the available credit.

(These figures are for example only. Any debt is accruing interest daily and shortly after you reduce the balance to $3299, interest will put you back over $3300 so planning ahead is crucial.)

•  Assuming you have “extra cash” after figuring out how much down payment is needed, it is wise to pay down other debts. A car loan that started at $20,000 could have payments for instance, around $400/month even though the interest rate is only a bit higher/lower than the mortgage rate. This is because your payment schedule is so much shorter. What if you only have have 6-12 payments remaining… or less than $5000? Eliminating the car payment means you have $400/month that can then be applied to a mortgage payment. Using a mortgage interest rate of 4.5% over 30 years, that means you might now qualify to borrow an extra $80,000 for your new home!  Is this the difference between affording to buy or not?  Is it the difference between dream house and settling for less? YES… this is good to know before you apply for a loan.

• What if you have credit card debt, a car loan and student loans? What order should you attack them for best gain in the mortgage department?  As a general rule:  Car, Credit Card then Student Loans. 

• There are credit score tiers that affect the pricing of interest rates.  Not many people really understand the “price” of an interest rate, but when you introduce different credit scores it is easy to see how a changing credit score impacts how much you pay.  It’s complicated, but using Excellent Credit as the baseline, let’s see how lower credit scores begin to impact the price you pay to get a mortgage.

For example, using a hypothetical interest rate of 4.50% on a loan amount of $300,000 with 20% down payment.  Keeping the interest rate constant for all credit score tiers, you can see how the “price” paid for the same rate is impacted:

• • • 740+      would receive the best price.
    • 720-739 would pay an upfront loan fee of .25% (or $750), more than 740+ at the same rate
    • 700-719 would pay an upfront loan fee of .75% (or $2,250), more than 740+ at the same rate
    • 680-699 would pay an upfront loan fee of 1.25% (or $3,750), more than 740+ at the same rate
    • 660-679 would pay an upfront loan fee of 2.25% (or $6,750), more than 740+ at the same rate
    • 620-659 would pay an upfront loan fee of 2.50% (or $7,500), more than 740+ at the same rate

Uh-huh… now you see! If I can help you raise your credit score from 659 to 740 before you need a mortgage, I’m saving you thousands of dollars. If you have an excellent Realtor and Lender on your team, you not only get the home you want, you save money along the way! Remember… with excellent credit you reap benefits like lower interest rates on credit cards and car loans AFTER CLOSING too – which brings me to the last point for today…

• DO NOT go opening lines of credit of any kind between starting your loan process and closing. I get it. You qualified for the loan, all is good, closing is a slam dunk in 10 days… now you think you can relax and tend to some other needs. Perhaps a new car for the new commute or (very common) new furniture at a place that offers $0 down and no interest for 5 years!  No. No. NO!  Wait until after closing. I don’t care if it’s 2 minutes after closing… AFTER CLOSING, when you have the keys in your hand.

Why? Sometime in the week leading up to closing, your lender is going to re-pull your credit to make sure you are still that person with the same credit score that qualifies you for lower closing costs. If they find new lines of credit you have two problems.  (1) A possible monthly payment on the new car means you qualify for less monthly payment on the house. (2) The activation of a new line of credit, even one with zero interest for 5 years, will lower your credit score. If you were a 682 and fell to a 672, you will now need to come up with a $3000 upfront loan fee at closing!!! Is that new $0 down, zero interest for 5 years worth $3000 to you? You could lose the house over this. And your deposit on the house!

 

Moral of the story is: CHOOSE WISELY. You need to work with people who help you stay on target to reach your goal. People who care enough to talk about things that might make you a bit uncomfortable, but are working in your best interests. ANY Realtor can write the contract and take trip to Mexico between then and closing and any Lender can present you with a loan and never educate you on how you can actually keep more cash in your pocket and still get the same loan.  Apparently any website can take advertising dollars and fill your inbox with offers that are too good to be true!

Final thought, then see you next time for: 30 Days of Real Estate: Day 6

If you don’t value yourself and your money, don’t expect that other people will either!