Keep Your FICO Score High For Best Mortgage Rates
Thinking of buying a home in Austin soon? For today's home buyers, the value of "good credit" has never been higher. Virtually all Mortgage loan approvals will depend on your FICO score, as does your final mortgage rate, which varies depending on what range your FICO score falls into.
If you're shopping for a home or contemplating a refinance, be aware of how credit behaviors can affect your FICO score. Even small events can make a big impact. For example, we often work with clients who's score is only off by a couple points from getting a the "best rates." Do you think the lender is going to make an exception? Probably not... So, it pays to know where you stand with your FICO score several months in advance.
Tips to Improve Your FICO Score
Recently we blogged about the benefit of paying credit cards before the statement date. Here are some additional general "common-sense" things you can do to improve your credit and FICO score before applying for a mortgage.
Keep a Cushion On Your Credit Cards
First, always keep a "cushion" on your credit cards. 30 percent of your credit score is linked to "Amount Owed" and a big part of Amount Owed is a raw calculation of (1) What you owe in dollar terms, against (2) How much credit you have at your disposal. The credit bureaus want to see at least 70% of your credit "available".
If you can keep your cards at least 70% available, your credit scores should improve. For example, if all of your credit cards give you access to a combined $50,000 and you are using $10,000 of that available credit, you have 80% of your credit available to you and this is "good". Raise your balances to $30,000 and this is "bad".
Don't Make a Major Purchase Prior to a Mortgage Application
Second, don't make major purchases on credit prior to making a mortgage application. This includes opening a store charge card to save 10 percent or more on a washer/dryer set, for example; or for any other appliance or furniture piece.
The reasons why are two-fold. One, store charge cards are often opened with a limit matching your initial charge, rendering them 100% utilized. This is bad for a FICO, as discussed above. And, two, opening a new charge cards has a negative FICO impact anyway. Charge cards are associated with high default rates.
Make all Monthly Payments in a Timely Manner
Third, make all of your monthly payments on time—even the ones in dispute. You may not want to pay that $80 wireless phone bill, for example; the one that you think you owe, but remember that Payment History accounts for 35% of your credit score. Even one late payment—or payment in collection—and your credit score can drop dramatically.
It's often less expensive to pay a bill in dispute than to be relegated to a higher mortgage rate. The payment in dispute is remedied today. The payment on that mortgage rate lasts for 30 years.
Also, be wary of seemingly benign traffic tickets, even simple parking tickets. If these are not paid, they will almost always end up on your credit report once a collection agency gets ahold of them. I have seen FICO scores drop by 30-40 points, solely due to unpaid traffic tickets—or tickets that were paid late.
Check Your Credit Score Regularly
FInally, check your credit score regularly. Scores can and do fluctuate for a variety of reasons, and both reporting parties and the credit reporting agencies themselves make mistakes. If someone makes an error and you regularly monitor your credit, you can catch and resolve the problem quickly, before it can impact your score or impede your ability to get the best rates on a new mortgage or even on insurance and other products. Checking your score about once a month allows you to become familiar with the process and allows you to act quickly if you see something that is incorrect or that needs to be addressed. Protecting your credit score ensures you can always get the best possible terms on mortgages and other products, and is easy to do if you monitor regularly.
Don't Delay Working with a Home Mortgage Lender
If you are planning to purchase a home in the coming months, and have questions about your FICO credit scores, and how they relate to applying for a mortgage, it's best to connect with a mortgage lender who can answer your questions. Of course, you are welcome to contact us as well for additional tips. And if you're looking bo buy a home in the next 1-3 months, DO NOT DELAY—working with a lender today to get pre-approved! You will be saving yourself a lot of frustration when it comes time to search for a home and make an offer.