By Lily Leung 06:32p.m. Jun 1, 2012 [Link to original article]
Remember that department-store card you signed up for to get an instant discount? Or the medical bill you didn’t pay on time?
What seem like minor moves could drive down your credit score, which factors in big time when you’re trying to finance your future home. Lenders look at how much you make, what you own and how much you’re able to put down — but your credit score also is a major factor.
“It’s four basic factors: income, assets, credit and the property itself,” said Chad Baker, La Jolla-UTC Branch Manager at W.J. Bradley Mortgage Capital LLC.
“If anything is wrong with the four, then you will have problems,” he added. “If you need a higher down payment, then you can offset it with a gift from a friend or family member. But if you’ve exhausted everything (to fix your credit,) there’s nothing you can do. So, it’s extremely important.”
The good news: Certain credit-score issues can be fixed on your own at no cost as long as you understand a few financial basics — from paying bills on time to requesting your free credit reports. Those simple pointers could help you not only qualify for a mortgage but also save you up to thousands of dollars in the long run.
They can also make or break your chances in today’s tougher lending environment, which generally requires a bigger down payment and more proof of income than during the last housing boom.
A recent study shows the average credit score for someone who successfully closed any kind of mortgage in April was 745 (with 20 percent down). The findings, based on 20 percent of loan originations in the country, are from Ellie Mae, which provides services to the mortgage industry.
The U.S. average is 692, and California’s is 691, according to FICO, which rates consumers’ credit histories on a scale of 300 to 850. So, if you don’t have the 745 score cited in the Ellie Mae study, does that mean your chances of getting a mortgage are nil? No, mortgage insiders say. U-T San Diego busts that credit myth and others in this how-to guide:
Myth: Lenders are looking for one magic number.
Fact: The score range you should shoot for depends on what kind of mortgage you want. For a conventional loan, which makes up almost 60 percent of total purchase loans in San Diego County, an ideal score is 680 or more, said Baker, of W.J. Bradley. For a loan backed by the Federal Housing Administration, or FHA, lenders say a safe bet is 640 and up, but some may consider scores as low as 600, Baker said. FHA loans make up more than 23 percent of purchase loans in the county, DataQuick numbers show, and usually are a go-to for first-time buyers since the down payment requirement tends to be lower.
For the best pricing, lenders are looking for a 740 or more, said Kurt Branstetter, loan officer and mortgage manager at W.J. Bradley Mortgage in San Diego. Branstetter is referring to the tiered pricing system from Fannie Mae and Freddie Mac, which own more than 60 percent of mortgages in the state.
Other mortgage tips
• Pay attention to medical collections. They often give would-be borrowers some of the most financial heartburn, said Kurt Branstetter, of W.J. Bradley Mortgage. If the medical delinquency in your record is accurate, be quick to pay it in full. Sometimes collection agencies are willing to work with you.
• Watch the balances on your credit cards. If you’ve used more than 30 percent of your available limit, that may be reported as a negative in your credit report, said Chad Baker, of W.J. Bradley. If it’s more than 30 percent, pay down your balances.
• Check your credit report at least once a year.
• Pay your bills on time.
• Start the mortgage-buying process early, so you have time to fix any issues.
• Consider visiting with home counselors who are certified by HUD, the country’s housing agency, said Appaswamy “Vino” Pajanor, president and executive director of Housing Opportunities Collaborative. You also can enroll in a first-time homebuyers course that can take you through the ins and outs of credit. Help is free. To learn more, call (619) 283-2200 or (800) HOC-0503.
What’s the difference in dollars? If you have a 740 credit score or higher and put 20 percent down for a $400,000 loan, then you could expect to pay $1,000 in fees. It goes up to $2,000 if you fall into the 739-720 tier, Branstetter said. “You don’t have to pay that,” Branstetter said, referring to the fees. “You can take a higher (mortgage) rate.” But either way, a lower credit score in those cases would mean more money out of your pocket.
Myth: There’s nothing I can do to change my credit score.
Fact: You have more control than you think. Changes all start with knowing what’s in your credit report. Everyone is entitled to one free credit report a year from any of the credit bureaus: Experian, TransUnion and Equifax. While these free reports don’t typically disclose a credit score for free, they do give a thorough account of your credit history, from that department-store card you got on a whim to the dentist checkup you forgot to pay for.
“The good and bad, it’s expressed in numbers, that’s all,” said Southern California credit expert Nabil Captan during a seminar at this week’s San Diego Association of Realtors’ Expo.
If you notice anything astray in those reports, you can report it to those credit agencies. They are required to correct or zap any inaccurate or unverifiable data in your accounts, under the Fair Credit Reporting Act. Consumers also can have a mortgage professional run a credit-score check.
Myth: Even if I do find an error in my credit report, it will take forever to correct.
Fact: You can get a rapid rescore done with the help of the lender. Branstetter, of W.J. Bradley Mortgage in San Diego, says a current client was shocked to see her score fall to about 720 from her usual 780 range.
A closer look at her credit report showed a late payment on a department-store credit card bill that apparently had been sent to another address as a result of a typo.
The consumer was able to talk to the credit lender and get the correction in writing to share with all three credit agencies. These types of corrections take about a week to several months to correct, depending on the issue and credit company. To get the issue resolved more quickly, borrowers can do a rapid rescore, which typically costs a fee that’s sometimes absorbed by the mortgage lender. Rescores usually take two to three days to process. Be sure to ask who will cover the cost of the rapid rescores.
Myth: I’ve never been late on any payment, so it’s a waste of time to check my score.
Fact: Errors in credit reports happen all the time, everything from incorrect birthdays to paid balances shown as delinquent. The advice is, check everything.
Myth: The definitive source to get my free credit report is freecreditreport.com.
Fact: It’s actually annualcreditreport.com. Once you go to the site, choose the state you’re in from the drop-down menu and click request report. Then you’ll fill out a brief questionnaire that wants identifiers from your name to Social Security number.
Once you get access to your free credit reports, the agencies will ask if you want to buy your credit scores. You can, but be wary: The credit scores provided by TransUnion, Experian and Equifax may not always used by lenders.
For instance, Experian’s website cautions: “Calculated on the PLUS Score model, your Experian Credit Score indicates your relative credit risk level for educational purposes and is not the score used by lenders.”
W.J. Bradley Mortgage in San Diego and most mortgage lenders run scores from all three bureaus and take the middle number. However, if you’re in doubt about the lender’s methodology, be sure to ask.
