Q:Â What do you advise a financially fit homebuyer to do to increase their credit score or make themselves more attractive buyers, to qualify for the lowest mortgage rates?
A:Â Â A
FICO score of 700 (FHA)/740 (Conventional) or better qualifies you for the lowest rates. In
fact, it qualifies you just as well as a higher score, so if youâ€™re at
or over 700/740, thereâ€™s no loan qualification rationale for investing
effort into boosting it. Â But these are firm breaking points. The
difference between a score of 698 and a score of 700 (in an FHA loan scenario) can cost you a
quarter of a point in interest, or thousands of dollars over the life of
your mortgage. Iâ€™ve found that people asking about how to boost their credit to qualify for the best
interest rates is similar to people asking me how to lose weight: I tell
them the truth, then their eyes glaze over when I give them the
straight dope, no magic bullets. Â No one wants to hear: eat
vegetables, cut the sugar, and exercise; similarly, they donâ€™t want to
hear pay your bills on time, every time.
But Iâ€™ve been asked this
question a lot recently, so here goes, anyway! Â Â Â Â 1.Â Â Â
Pull your reports online â€“ get them for free, no strings attached, at
the government authorized website AnnualCreditReport.com. Â This doesnâ€™t
get you your actual FICO scores, but it does get you the content of your
report. Look for errors that could be depressing your score, like
accounts that donâ€™t belong to you, balances that are actually lower than
reported, old debts that are paid off that should have been removed
entirely (7 years for credit cards, 10 for bankruptcies).
Â Â Â Â Consider reopening accounts you thought were open but have been
closed because you havenâ€™t used them in so long - it will help boost
your utilization ratio, one element of your credit score that is
dependent on how much available credit you have. 3.
Â Â Â Â Pay down some debt. Â This both decreases your debt-to-income ratio
(36% is the goal, including the proposed mortgage payment) and
increases your credit score, if you do it right (see the next tip).
Â Â Â Donâ€™t close any accounts. Â Instead, spread your debt out. The ideal
utilization ratio is about 20-30% of your available credit overall, and
on any given account. Â Closing accounts reduces the amount of credit
that is available to you, so it makes it look like youâ€™re closer to
being maxed out.
if you have one card thatâ€™s near its max and several others that have
zero balances and youâ€™re trying boost your score a bit, quickly,
consider balance transfers to spread our your debt more evenly, aiming
for 20-30% of the available credit on each card. 5.
Â Â Â Use your credit regularly â€“ and pay it on time, every time:Â Having a good FICO
score doesn't happen because you have sound personal finances, including no debt. FICO scores are
a measure that shows that you have a history of responsibly
using and managing and repaying your debt on an ongoing basis. 6.
Â Â Â Â Finally, check in with your mortgage broker. Â Have them pull your
report and score, as the report they pull is the one theyâ€™ll have to go
by in the final analysis. Â If youâ€™re really close to a score level
higher, that would empower you to qualify for a lower rate, they can
actually run a credit diagnostic on your score and generate some
recommendations for which actions you could take to raise your score by
the needed few points. Then many of them can do whatâ€™s called a â€˜Rapid
Rescoreâ€™ â€“ once youâ€™ve paid that bill off, they can actually submit a
request directly to the credit bureaus to update that information and
your score in just a few days.
of these tips will get someone with a 500 credit score to a 700 (other
than a massive debt reduction program). Â But if youâ€™re trying to get a
little boost to get you over a credit score hump, these can be potent,
and save you beaucoup bucks in interest.
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