Getting Your Credit Mortgage Ready

It’s important to start with a good understanding of the factors that determine your score, while scoring models vary a little most follow this allocation: 

• Payment history 35% 
• Credit utilization ratio 30%
• Average age of credit 15%
• Credit mix 10%
• New credit 10% 

What score is needed to get a loan? 

There are different requirements for different loan types. In addition to the basic requirements for the loan type the lender offering the loan may have additional “overlays” meaning requirements above the standard underwriting requirements.  

Here are some credit milestones to keep in mind 

• 500- The minimum score required for an FHA 10% down loan, sometimes hard to find due to lender overlays 
• 580- The minimum score required for an FHA 3.5% down loan 
• 620- The minimum score required for a conventional loan and many of the state DPA programs 
• 640-Even more state DPA programs available 
• 740- Generally the score needed to get the best rates and terms as advertised. 

What are Tradelines? 

Additionally, most loans require you to have the right mix of credit accounts on your credit report to show you can manage different types of debt. These are often referred to as tradelines. The number and type of tradelines required may vary by loan type and lender. And the lender may require tradelines to be seasoned a certain number of months prior to being eligible for a mortgage. So, if you are starting with little to no credit you may need to open new accounts and wait for them to be seasoned to the lenders requirements before being eligible. 

What can you do to increase your score and your chances of preapproval at the best rates and terms? 

Pay bills on time 

The number one factor in your credit score is payment history and it’s the hardest factor to recover from if there’s negative information reported. For example, a late payment will stay on your report for seven years impacting your score significantly at first with the impact decreasing over time. On the flip side high credit utilization is measured as it stands now so it can be quickly paid down with no lasting effect on your score.  

Pay down credit card balances 

Your credit card utilization should stay below 30% and the lower the better. Use a credit monitoring service to easily track the utilization of each card and overall. Paying down your revolving credit accounts will help you in two ways, it will reduce your credit utilization percentage which is a big factor in increasing your credit score, but also paying off credit cards entirely will eliminate the minimum payment from your DTI calculation thus increasing the maximum mortgage payment you qualify for 

Assess your collections and defaulted accounts 

There’s a big debate over paying past debts in collections. Is it worth the money spent? It’s going to depend on the age, type of debt and the total balance. The newer the debt the more it affects your credit score, so you’ll see more benefit in paying off a recent bad debt than an old one. Additionally, some loan types may require collections to be paid or entered into a payment plan, depending on the type and amount of the collection. You also must be careful about disputing a collection prior to applying for a mortgage, underwriting requirements for many loan types take an issue with disputed collections. Guidance in assessing collections accounts is another good reason to start working with the lender well in advance of your target move date. You’ll get guidance on what collections are deal breakers for a mortgage underwriter, to help you prioritize what is most important to pay off.  

Don’t close old accounts

If you fully pay off a credit card don’t close it. The longer your accounts are open the more they increase the average age of your credit lines which increases your score. And if they are revolving lines of credit with no balance, they help your credit utilization percentage.  

Don’t open or apply for new accounts 

If you already have the right mix of credit accounts, and are looking to get a mortgage soon avoid opening new accounts, the new accounts will bring down the average age of your accounts lowering the credit score, additional accounts with a minimum payment will add to your total debt, and just the hard inquiry to apply can impact your score slightly, you may also have to explain each inquiry to a mortgage underwriter.  

How fast can you increase your score? 

That depends heavily on the negative factors bringing your score down. If it’s late payments unfortunately the only cure is time, that’s why it’s so important to stay on top of payments. But if your score is being hindered by high credit card balances, paying off the balance can have a significant impact pretty quickly. Also paying off collection accounts, especially recent accounts, can give your score a pretty quick boost. Often times creditors only report to the bureaus on a monthly cycle, so payments made may not reflect for a month.  

When assessing your credit health with a mortgage lender don’t forget to ask about a simulation and rapid rescore. Especially if you are short on time to get preapproval. The lender can run your credit profile through software that simulates what score could be achieved based on actions you can take, such as paying down debt or paying off collections. For example, if your middle score is 12 points away from the minimum score, or from the desired rate tier. The lender can run a simulation to see what actions might increase your score by at least 12 points, and they find that if you pay your 1200 Mastercard balance down by 800, you’re total credit utilization will lower and increase your score by at least 12 points. Then once you’ve take that action, you submit proof directly to the credit bureau and pay a fee to have them immediately rescore based on the updated information.  

If you’re buying soon:

Don’t open any new accounts and focus on maintaining the accounts you have in good standing.  

If you’ve got some time:

If you don’t currently have the right mix of accounts or the minimum number or tradelines required for mortgage underwriting. Open only what you need to improve your credit profile and apply for accounts with a strong likelihood of approval as to not rack up unnecessary hard inquires on your credit. Focus on lowering your DTI if it’s high by consolidating debt, but where possible don’t close old accounts.