I recently met with a couple who had relocated to the Seattle area and were ready to make an offer on a home. They’re very qualified with their income stability and enough savings to put a twenty percent down payment on their next home. What surprised them was the credit report.
Apparently when they moved to Washington, a department store did not correctly update their records. The amount owed to the store was small and Mr. and Mrs. Homebuyer typically paid the bill off in full whenever there was a balance and they received a statement. Problem was, they stopped receiving the statement with their move.
The department store reported Mrs. Homebuyer as being 30 days late on a $10 dollar payment and over the credit limit by $20. It was a double-whammy to her credit score. Other than this blip, their credit history was stellar. Mr. Homebuyer’s credit scores were over 740. This blip dropped her score to just over 680.
Mortgage rates and underwriting guidelines are based on the lowest middle credit score of all borrowers. Even though their credit had been perfect, we had to use the current score of Mrs. Homebuyer of 680.
The difference in mortgage rate between 680 and 740 is a 0.25 in rate or 1.5% in fee. Based on a 30 year fixed conventional loan of $400,000 today, priced with zero points (no origination or discount points):
- 740 score would have a rate of 5.00% and principal and interest payment of $2,116. (APR 5.060%)
- 680 score would have a rate of 5.25% and principal and interest payment of $2,208. (APR 5.312%)
The difference in credit score would cost them $92 per month or $6,000 in fee!
Their initial reaction was to pay off and close this department store card. Luckily I was able to advise them not to do this. As crazy as it sounds, closing established credit accounts can actually hurt your credit scores. Our goal was to have her credit score improve to where it deserved to be without the blip.
Instead, Mrs. Homebuyer contacted the department store to make them aware that they were in the process of buying a home and that because they did not update their address correctly in their system, it had damaged her credit score.
She insisted they correct their reporting with the credit bureaus and requested a written letter from the department store stating their error and what actions they were going to take. We wanted the letter for her records and in the event we would need to do a “rapid rescore” to improve her scores. She left her department store account open (at least until the purchase of their new home was successfully closed) and paid it down to a minimal balance (below 30% of the credit limit).
The offer on their home was accepted and we did lock at the higher rate based on the 680 mid-score. Ten days before closing, I repulled their credit and was delighted to see that their actions were rewarded. Her score rebounded to the 740 plus range it should have always been at. I was able to renegotiate their lock commitment based on their improved credit score which reduced their rate by 0.25%.
A little elbow grease saved Mr. and Mrs. Homebuyers thousands of dollars in interest and mortgage payments over the life of their loan.