5 Tips to a Higher Credit Score; Lower Mortgage Rates
Lenders use your FICO® (Fair Isaac Corporation) score to determine your credit risk, or ability to repay a loan. The more you understand how much it can affect how lenders see you and what loan terms they offer you, the better prepared you’ll be when it comes time to apply for a mortgage.
How to know whether you have a good credit score
The FICO® score takes into consideration payment history, current levels of debt, length of credit history, new credit, and types of credit used. It typically ranges from 300 to 850. A good score is usually in the range of 670. While many lenders use FICO® scores to help them make lending decisions, each lender has its own strategy. This includes the level of risk it finds acceptable for a given credit product. The better your score, the easier it is to be approved for a home loan, not to mention you’ll receive lower mortgage rates.
The following are some tips that will help you understand the importance of, and function of, your FICO® score:
- Even one late payment can reduce your credit score by more than 50 points. On-time payments are the most important factor in calculating your FICO® score. Be consistent and diligent about making payments on time.
- A creditor can report a late payment at any time, even if the payment is one day late.
- Yet, a shorter late payment (e.g. 30 days) is not as severe as a later payment (e.g. 90 days).
- Numerous late payments are calculated into your final FICO® credit score. One missed payment may be an oversight, while five may be detrimental to your financial portfolio.
Start on the right path to successful financial management
Check your credit report
Once a year, request your credit report from the top three bureaus: Experian, Equifax, and TransUnion. To check your score for free, use Mint for your personal finances — the score is updated regularly. Or use a distinct provider such as Credit Karma or WalletHub. Receive your free copy of all 3 reports once annually from annualcreditreport.com.
Dispute any errors
Ask to have inquires removed that you did not request. As important, most credit card companies will work with you if there was one instance where you forgot to pay on time. Call the lender directly and ask for removal. Just be sure all future payments are on time.
Pay down the balance
This is especially true when it comes to high-interest cards. Ensure you pay on time monthly and make efforts to pay more than the minimal required payment. Paying your cards off in full — on a monthly basis — is ideal for achieving the best FICO mortgage rates.Also: be sure you are not maxing out card balances. It’s much healthier to actively use a couple of cards versus just one. And — believe it or not — you shouldn’t close any extra cards that have zero balance. This will help you maintain a higher utilization limit.
Set up payment reminders
Setting up payment reminders only takes a few minutes, but can have a significant impact on your ability to make payments on time. This is a great step to take because making your payments on time is one of the most important factors in determining your FICO® score. You don’t want forgetfulness to sabotage your FICO® score when you have the funds to make your payment on time.
Improve your credit utilization
Credit utilization (or balance-to-limit ratio) measures how much money you owe creditors compared to how much credit is available to you. For example, if you have a $2,000 balance on your credit cards but have a $10,000 credit limit, your credit utilization ratio would be 20%. To improve this ratio: pay off debts, especially those close to maxing out. To receive the best FICO mortgage rates: keep your debt utilization ratio under 30%.
Though it doesn’t affect or influence your credit score, you should also be mindful of your debt-to-income ratio, or your total debt divided by your monthly income. This number is as important as your credit score, and lenders look at it when deciding whether or not to lend you money. So, if you want a lower mortgage rate, you’re going to want a low debt-to-income ratio.
Curious where you stand? Try this debt-to-income calculator. Just be sure to include all financial obligations into your debts, including rent/mortgage payments, car loan, student loans, child support/alimony, and any other type of loan that requires monthly payments.
Once you feel you have healthy credit, start shopping around for home loans. Of course, you can shop anytime, but good credit history makes it much easier to qualify. Our in house credit care team also may be able to help. If your credit doesn't quite meet our lending requirements, our credit care team can coach you through any credit weaknesses and may be able to help you improve your score.
Get to know some of the most popular loan programs
If you’re looking for a low down payment option that requires minimal lines of credit or one that is open-minded to bad credit, consider an FHA loan. Assuming you have a 600 or higher FICO®score, you may only have to put down 3.5% of the home’s purchase price. Depending on which lender you’re working with, that doesn’t mean you’re excluded from this loan option should your credit score be lower than 600. You just have to come up with a larger down payment, looking closer to 10% of the home’s purchase price. Either way, you’ll only need two lines of credit to qualify.
Another option is a conventional loan. Credit score requirements for conventional loans vary by lender but tend to require a minimum of 620. With this loan program, it’s expected you have good credit history and overall good to excellent credit. In return, you can expect to receive some of the most competitive interest rates and loan terms.
Through a VA loan, there is no minimum credit requirement. Each lender sets its own guidelines. At American Financing, we look for scores that are at least 600 for new home purchases or 620 for refinances, both of which fall closely in line with what other lenders require. We, of course, review the entire loan profile before making a lending decision and do not base our decision strictly on credit score.
No matter what your score, it’s always worth a call to see exactly what you can qualify for. After all, this loan program offers some of the most attractive overall benefits to our armed forces and veterans. You have the facts. So, it’s a great time to make your next move — whether it’s continuing to build your credit or starting the mortgage process. Remember, the salary-based mortgage consultants at American Financing are here to guide you through options when you’re ready.