The better your credit report, the lower your mortgage rate. Below I provide tips to help you improve your credit score quickly, how mortgage companies review your credit, correcting credit report errors, and more.
Credit Report Tips
Here are three credit report tips to help you quickly obtain a higher credit score.
- Keep your credit card balances below 35% of your credit limit: Remember that credit card companies report to the credit bureaus your balanced owed before you make your monthly payment. Even if you pay off your credit cards each month, the credit bureau will still report you owe a balance.
To avoid this, make your payment to the credit card before your bill cycles. This way, when the new bill gets issued, it will show a lower balance, and that lower balance will get reported to the three credit bureaus. Making the payment before the bill cycles is especially important for those that charge a lot to a credit card each month and pay off the balance in full.
- Credit Cards: If you have three to four credit cards, try to avoid getting another one, even if the credit card company offers a great deal. There is something called having too much credit, and when you start having five, six, seven, or more credit cards, that could negatively affect your credit score.
You might want to get a third if you only have one or two credit cards. Also, you must use your credit cards actively to show you can manage credit effectively. I have seen applicants that have several open credit cards they never use and a low credit score. That happens because the person is not demonstrating they can manage credit; in this scenario, the only thing you are showing is you have open credit that you don’t use.
- Avoid Disputing Old Items: If you haven’t reviewed your report in a long time (let’s say three years) and are seeing some errors be careful about the errors you want to dispute. If there is something like a cell phone collection for $50 from five years ago (that you paid), you might not want to dispute the item.
If you’ve paid everything else on time (or mostly on time) over the last 3-5 years, that cell phone collection account probably impacts your credit score very little.
And in time, that collection account will fall off. If you dispute the collection account and the cell phone company says it was valid, it might further impact your credit score negatively since the company validated the collection. While no one wants to have errors on their credit report, it’s essential to be smart about errors, especially ones that are not recent.
When a 740 credit score is the same as an 800 (or higher) credit score
Did you know that sometimes a person with a 740 credit score can get the same mortgage rate as someone with an 800 (or higher) credit score?
So trying to keep it above an 800 might be more work than necessary since it provides little to no benefit when obtaining most mortgages. Knowing how simple it is to improve your credit and what mortgage companies look for can save you thousands of dollars on your next mortgage transaction.
Don’t waste your time on something like a perfect credit score since it will have limited to no benefits.
How Mortgage Companies Review Your Credit Report
Most homeowners know little about how mortgage companies look at credit reports. In fact, some Loan Officers have little-to-no knowledge about the subject because they never take the time to educate themselves on what’s important. When a mortgage company reviews your credit report, they are looking at the following:
- Your credit score
- Payment history
- Balances and monthly payments
- Inquiries and previous addresses
- Additional items, such as liens and bankruptcies
The most important thing, though, is your credit score, payment history, balances, and monthly payments, and this is what we’re going to focus on. If you want a high or higher credit score, must to show the three credit bureaus (Trans Union, Experian, and Equifax) you can manage credit wisely.
Some people mistakingly think that if they don’t have any credit cards, car loans, or other types of debt obligations, then that should help them get a high credit score. That is entirely wrong, and people who do this end up having a lower credit score.
Ideally, you’ll want three credit cards and a car loan, which will increase your credit score over time. Make sure you pay your payments on time and never max out your credit cards. All three bureaus offer a credit monitoring service; however, if you wish to use another credit report service myfico.com is a good place to look.
The Myth About Credit Inquiries
A long time ago, credit reporting agencies used to ding your credit score when you applied for a loan. That is no longer the case for most circumstances, especially when you apply for a mortgage.
Credit bureaus understand that you must allow companies to check your credit to obtain credit. Now, if you apply for five different credit cards, your score may drop. But applying with two-three mortgage companies generally does not affect your credit score (the same applies with car loans).
Remember that you don’t want to be excessive with the number of times your credit is checked.
Credit Score Levels
Here are the various levels that are important to most mortgage companies:
- 760 – 779
- 740 – 759
- 720 – 739
- 700 – 719
- 680 – 699
- 660 – 679
- 640 – 659
- 620 – 639
- 600 – 619
- 580 – 599
- Below 580
Most people with a 620 or higher credit score will usually be able to secure some sort of funding provided they meet the other basic requirements for Conventional and FHA mortgage lending; a down payment of 3.5% or more and a Debt-To-Income ratio below 45%.
Correcting Credit Report Errors
Correcting credit report errors has become easier; however, it’s still a bit of a pain. If disputing an item might lead to a higher credit score and a lower mortgage rate, then it might be worth the time and effort. If you use one of the three credit Bureaus to view your credit report online, you might be able to dispute the error directly online (the easiest way).
That process should only take 10-15 minutes, and then you’ll have to wait to hear back. The traditional method still stands as well; write a letter to the three bureaus disputing the specific error and include any proof you have to prove your dispute in the envelope.
Mailing Addresses For The Three Credit Reporting Bureaus
TransUnion Consumer Solutions
P.O. Box 2000
Chester, PA 19016-2000
Experian Credit Disputes
P.O. Box 4500
Allen, TX 75013
Equifax Information Services LLC
P.O. Box 740256
Atlanta, GA 30374-0256
Less Than Perfect Credit Mortgage Programs
If you have less-than-perfect credit and want to buy a home or refinance a current mortgage, there are options for you to consider. In fact, someone with a credit score below 600 is eligible for a new mortgage. The best thing you can do is discuss your situation with a trusted Loan Officer who will offer suggestions to improve your score and what options are currently available.
Whether it’s a Conventional home mortgage or an FHA home mortgage, there are options, and you should take the time to find out if you can obtain a new mortgage.