I was planning on writing an in-depth post of how to boost your credit, but I also believe in efficiency, and a colleague of mine, Ben Miller, at Mortgage and Realty Professionals in San Diego, forwarded me this article from the Novemeber 2007 edition of “YOU Magazine”.
I found some great tips on how to increase your credit score to get a loan for that perfect San Francisco home you’ve had your eye on. Read on for some awesome advice!
(YOU Magazine) – We all know the phrase “buy low, sell high.” Many of you may be wondering if now is the time to “buy low” in the real estate market. Prices are down, inventories are up, and interest rates are near historic lows. This month YOU Magazine looks at how a smart investor or homeowner can become loan ready, and prepare his or her credit profile to take advantage of the buyers’ market. Whether you are looking to invest, buy, or refinance now or in the coming months, your credit is going to play a more significant role in today’s tight-fisted credit environment than it has in the past. This article will help you put together the kind of sound credit profile that any underwriter can appreciate.
In general, underwriters analyze your overall creditworthiness from three angles: your credit score, your income, and your assets. Let’s take a closer look at these three elements.
Your credit score represents your willingness or ability to repay debt. Scores can range from 350 to 850. When arriving at your score, the credit scoring system analyzes various elements of your current credit situation, including your debts, payment history, and credit types. It’s important to note that payment history accounts for only 35% of your overall score, so it takes more than paying your bills on time to increase your score. In today’s market, a score of 620 or below would be cause for concern, because even a small difference in your credit score can cost you big. In fact, Fannie Mae recently announced that effective March 1, 2008, any loan in which the borrower’s FICO score falls below 680 will incur either higher interest rates or fees charged at the time of closing of up to 2.00%. For example, on a loan amount of $200,000, a borrower with a FICO score of 619 or lower, would be required to pay $4,000 or experience a higher interest rate. This means clean up your credit now or pay a higher price later.
But here’s the kicker. Nearly 80% of all credit reports contain errors of some kind. Recent studies also indicate that about one-fourth of these reports contain mistakes so egregious that applicants could actually be denied credit. With this mind, the first step to putting your best foot forward is making sure everything in your credit report is accurate. To do this, visit www.annualcreditreport.com and get a free copy of your credit report right away. (Note: free credit reports do not include credit scores. Scores can either be purchased online or pulled by your mortgage professional.) Once notified of a mistake on your report, a credit bureau has thirty days to investigate and respond. If the information can’t be confirmed, the item should be removed.
While you’re online, be sure to visit www.optoutprescreen.com as well, and avoid the hassle of being bombarded with unsolicited mortgage offers, and make life a lot easier throughout the mortgage process. Finally, ask your mortgage professional to pull your credit for review as well and make sure that everything is accurately reported.
And what about those of us with a credit history we would rather forget? All is not lost. For individuals with spotty credit a lot can be accomplished with a professional credit improvement company. If you do decide to utilize a credit professional, plan on about 90 to 180 days for maximum results. An experienced mortgage professional can share other insights into the ins and outs of credit scoring.
For an underwriter, your income is another tool to help calculate the overall risk of loaning you money. Let’s be honest: If you’re looking to get a loan in the next 6-9 months, it’s unlikely that your income is going to change drastically in that period. However, whether you’re self-employed or salaried, there are a number of tax decisions you can make today that could negatively affect your debt-to-income ratio (the amount you make each month and the amount you owe), which affects how much you’re qualified to borrow. (See Your Finance for more information.)
In other words, talk to a mortgage professional about the common guidelines that allow for debt-to-income ratio (DTI). While some loans have been approved with ratios exceeding 50%, many conventional guidelines state that DTI should not exceed 36-40%. Depending on your overall profile, DTI may be able to reach as high as 45-50%, but it’s best to keep this number as low as possible.
Finally, although it is still possible to get loans without income documentation, these loans are almost impossible to obtain without great credit scores, particularly if you’re looking to secure a jumbo loan.
The more money you have available after closing, the less risk you pose in the eyes of an underwriter. This means any assets available above and beyond your down-payment. And down-payments are back in style. That’s because 100% financing programs, while still in existence, are scaled back, and the costs for obtaining a loan with no equity have increased. In addition, many loan programs, particularly those that don’t require income documentation, will now require that after closing you have ample reserves or certain liquid assets that are congruent with the income you say you are making.
If you’re even thinking about buying or refinancing real estate in today’s market, it’s important to talk to your mortgage professional before making any financial decisions that could affect your loan profile, including opening or closing any credit accounts. More importantly, you have to act now. Timing the so-called bottom of the market is a very difficult task, even for the experts. Great deals on real estate are available in just about every market right now, and interest rates are still very attractive. If you are looking to purchase a home, think long term and don’t focus on the next 12-18 months. For those trying to sell a home, now is the time to be realistic about the current market cycle and take action. Remember, anything you give up on the sale side will be captured on the buy side. Bottom line: Do what’s right for you today, and it will be right for you tomorrow.