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Improve Your Credit Score To Get Better Mortgage Rates

Credit score FICO improvementFor home buyers in Boulder and nationwide, credit scores can change low mortgage rates and alter home loan approvals.

Borrowers with high credit scores get access to lower mortgage rates, for example, and can find the mortgage approval process to be more smooth that borrowers with low credit scores.

If your credit score is low, here are some basic ways to help improve it. 

Get The Reports
Download an updated version of your credit report from each of the three major reporting bureaus — Equifax, Experian and TransUnion. The reports may mirror each other, but credit accounts — especially derogatory ones — sometimes don’t appear on all three. Ordering reports from all three bureaus is a safety step. Note that the credit bureaus each use different scoring models so your credit scores will vary.

Check For Errors
Yes, credit reports can have errors in them. Should you find any items on any of the three credit reports which, in your opinion, do not belong or are erroneous, contact the credit bureau regarding removal. Errors on a credit report must be addressed with each bureau individually. 

Pay Up 
Or, rather, pay down. Be diligent about paying down your credit card balances in order to lower the percentage of your credit line(s) in use. In general, aim for a 30% ratio or less. An added benefit of paying down debt is that it can lower your total monthly debt load, which can increase your maximum home purchase price.

For items which are harming your score, such as a 30-day or 60-day mortgage late payments, medical collection items, and/or judgments, consider writing a brief letter which explains the circumstance of the derogatory credit event. Such a letter won’t help your score to improve, but it can help your lender to make better credit decisions, which can aid in “exceptions”, if required.

Making even minor changes to an overall credit profile can yield measurable long-term results. It can also result in lower mortgage rates.

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Applying For A Mortgage Soon? Don’t Open New Credit Cards On Black Friday.

FICO recipeBlack Friday is 3 days away. It’s the official start of the 2010 Holiday Shopping Season.

Sales are expected to top $111 billion this year and, already, businesses are vying for shoppers and their dollars. Newspaper circulars are getting larger, and in-store discounting is more prevalent.

But one discount that shoppers should think twice about is the popular “Open A Charge Card, Save 20%” promotion. The short-term savings may be tempting, but the long-term costs may be huge.

It’s because of how credit scores work.

According to myFICO.com, “new credit” accounts for 85 out of 850 possible credit scoring points, with new credit defined by such traits as:

  • Number of recently opened accounts
  • Number of recent credit inquiries
  • Time since recent credit inquiries
  • Proportion of new accounts to all accounts

These traits are negatives against a FICO score so with each new, in-store credit card application, a person’s credit score will fall. The fall will be especially pronounced for persons lacking credit “depth”, or who have made a disproportionately large number of new credit applications recently.

For soon-to-be homeowners, or would-be refinancers in Broomfield , credit scores are worth keeping high. This is because credit scores change the mortgage rates and/or loan fees for which an applicant is eligible.

As an illustration, assuming 20% equity on a $200,000 conforming loan:

  • 740 FICO : No added loan costs
  • 720 FICO : 0.250% increase in loan costs, or $500
  • 700 FICO : 0.750% increase in loan costs, or $1,500
  • 680 FICO : 1.500% increase in loan costs, or $3,000
  • 660 FICO : 2.500% increase in loan costs, or $5,000

 

It’s expensive to have a low credit score — more expensive than the money saved by opening a card at the mall, anyway.

That said, if you know you won’t need your credit for a mortgage within the next 6 months, the risk of applying for in-store credit cards is likely small. But if you’ll need your FICO soon, consider paying for your gifts full price.

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Better Credit Scores Get Better Mortgage Rates

This week marks the start of the Refi Boom’s 7th month across Colorado ; rates have been falling since early-April 2010. Whether you’re looking to refinance or buy a home, however, know that not everyone will qualify for today’s low rates.

Mortgage approvals are primarily based on good income, good equity and strong credit, and, without all three, the best rates of the day remain out of reach. Now, you can’t always ask for a raise and equity is a function of the housing market, but you can do something about your credit score.

In this 4-minute segment from NBC’s The Today Show, you learn some credit basics to help propel your score higher:

  • There’s no “quick fix” for credit. Time + Good Credit Behavior = Better FICOs.
  • Pay every bill when it comes due. Even one late payment can damage your score.
  • Don’t close old credit cards

Also among the segment’s advice is to stop worrying about whether rates have bottomed. Refinance today if it makes financial sense. Then, if, by chance, rates fall in the future, just refinance again.  Don’t be greedy, we’re told.

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See How Credit Missteps Lower Your Credit Score

The FICO Recipe

The company behind the popular FICO scoring model has published a “What If?” series for common, specific credit missteps.

If you’ve ever wondered how your credit score would be affected by a missed payment or a maxed-out credit card, now you can use a look-up guide to assess the probable damage.

As published by myFICO.com, here’s a few common financial difficulties and how they affect FICO scores.

Max-Out A Credit Card

  • Starting score of 780 : 25-45 point drop
  • Starting score of 680 : 10-30 point drop

30-Day Delinquency

  • Starting score of 780 : 90-110 point drop
  • Starting score of 680 : 60-80 point drop

Foreclosure

  • Starting score of 780 : 140-160 point drop
  • Starting score of 680 : 85-105 point drop

Not surprisingly, the higher your starting score, the more each given difficulty can drop your FICO.  This is because credit scores are meant to predict the likelihood of a loan default. People with lower FICOs are already reflecting the effects of risky credit behavior.

Also worth noting that the above is just a guide — your scores may fall by more — or less — depending on your individuak credit profile.  The number and type of credit accounts you hold, plus their respective payments and balances make up your complete credit history.

Read the complete report at myFICO.com.

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