Six actions to make your credit score worthy of mortgage
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By Scott Sheldon  August 7, 2014 12:01 pm

If you have been turned down for a mortgage or quoted rates and fees that seem too high, you may have some homework ahead. 

The minimum credit score to land a mortgage is 620. If you have the capacity and are in the position to do so, these credit actions may help save your credit and your house.

Contrary to popular belief, credit scores change and can even change more than once within a 30-day period. 

If you have either applied for a mortgage and learned your credit score has dropped or your loan is in process and there is a change to your credit score, taking the appropriate action can still keep your loan together. One way of the ways a quality lender can help is offering a rapid rescore service. 

A rapid rescore service allows you to make a change to a credit obligation by providing to the lender supporting documentation of whatever action you took, which they in turn use with your creditor to raise your score. 

Expect positive credit results within 48 hours.

 

Fix maxed out credit cards

Carrying credit cards with maxed out or near maxed out balances can be catastrophic to a credit score. You could have no delinquencies, no derogatory credit of any kind. But if you carry high balances on your credit accounts. your credit score could be lower to the tune of 70 points easily. The consumer looking to increase their credit score would be well advised to pay down the credit cards to at least 30 percent of the total allowable limit. If your credit card has a limit of $1,000, you never want to have a balance above $300, for example. 

Total allowable credit line multiplied by .3 tells you the balance you never want to exceed.

 

Consolidating loans

If you don’t have the financial means to pay down your credit balances to 30 percent credit limits, the next best solution is to consolidate your debt, thereby spreading the debt out over multiple credit accounts. Another key factor to remember is consolidating debt also reduces minimum payment liabilities, which subsequently increase borrowing power, making you more credit worthy. Increased borrowing power with a higher credit score increases your mortgage odds compared against reduced borrowing power with a lower score.

 

Stop closing credit cards

Quit closing credit cards, even if you are not using them. This can be hugely detrimental to your credit score because it shortens your credit history as time moves on. After applying for credit, if you feel you’re not going to use a particular credit card, simply stop using it, but do not voluntarily close the credit card with the creditor. The creditor may close the account due to activity anyway, but this usually occurs long into the future after the initial card is opened. Moreover, during all that time, you get the benefit of having an open credit line reporting favorably to the credit bureaus. Closing credit cards sends an artificial signal to the credit reporting agencies (CRA’S), that you cannot manage your liabilities even though that might not be true.

 

Reverse late payments

Late payments on a mortgage are by far the worst possible derogatory credit item beyond a bankruptcy, short sale or foreclosure that substantially reduce the credit scores. 

Also in this arena are auto loan payments, which have a very strong negative effect as well with regards to delinquencies and, of course, other loans and credit cards. 

If you have a legitimate reason why you relate and you can provide supporting documentation to your creditor, i.e. a billing mishap for example (creditors are humans too and people do make mistakes), then pursuing a late payment reversal can easily add 20 to 30 points your credit score, depending on what type of credit account it was e.g. mortgage or consumer debt.

 

Opening new credit

Some times the only way to increase a credit score perhaps due to tarnished credit history is to open up new credit with a fresh clean slate. Start small and work up. 

Opening the cash secured credit card with a local bank or credit union or even an online financial services provider can be a wonderful first step in starting over. After six months of “paid as agreed” history, you will be on the right track to building enough credit to obtain more credit. 

Next, apply for a store credit card wherever you like to shop. After this card is in place for the next six months, you can plan on having a score 10 to 15 points higher, coupled with stronger credit worthiness for preferred terms on the other credit obligations such as loans, consumer credit products and certainly mortgages.

 

Stop credit shopping

Make your payments on time, keep your balances in check or ideally pay them off in full each month and do not apply for multiple different types of credit entities within a 30 day period of time. In other words, applying for a mortgage, applying for a cell phone and applying for a credit card all within a month time frame does reduce your credit score because it represents a credit risk to the credit bureaus. It also demonstrates an inability to control finances with possible default risk. 

Applying solely for a mortgage does not reduce your credit score, so long as you’re not applying continuously over time. 

Consumers can get into trouble, especially when they are applying for different types of credit and hoping their credit score will not adversely be affected. 

Expect a credit score of at least 10 to 12 points higher here by only applying for credit when you really need it.

 

Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.

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