Establishing Credit Scores

2014-06-20_0758If you’re a reader of Mortgage Porter, you probably know that I just returned from a long weekend to Nashville to visit my son and check out his new apartment. Getting started on your own is an important part of your life and it helps to have established credit. This is especially true if you plan to buy a home as most lender will require that you have three to four established accounts. The credit lines you establish (and other credit events) will determine what your credit scores are.

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The ABC’s of Preparing to Buy Your First Home

Borrowers getting ready to buy their first home are often surprised…for different reasons. I find that some are surprised to learn that they do qualify for a home in their price range and some are disappointed to learn that they have a little work to do before they can buy a home. Getting preapproved with a mortgage professional helps take some of the “surprise” out of the process.

Here are some of the bare minimum “basics” that we look for qualifying a home buyer.

Assets: If you have a 401k, retirement or stock accounts that you’re not planning on using for down payment, often times these accounts are great to have on your application to show that you have “reserves” after savings. Additional assets add financial strength to your application.

Bank statements: Be prepared to provide all pages of your bank statements (even if the last page is blank) and to document any large deposits that are on your statements. Lenders want to know where your funds came from.

Credit history: It’s ideal to have three to four lines of credit in good standing for two years or more. Your credit lines should be used once a month with less than 30% of the credit line in use for revolving debt. New credit lowers scores and old established credit that is paid on time raises credit scores.

Credit scores: Most lenders that we work with currently have a minimum credit score requirement of 640. Lenders use the lowest “middle score” of all borrowers applying for the loan.

Debt-to-income ratios: Lenders like to see your back end ratio no higher than 45%. This is calculated by dividing all of your monthly debts plus the proposed total mortgage insurance payment by your gross monthly income.

Down payment: Currently (as of the publishing of this post) FHA allows a 3.5% minimum down payment; Fannie Mae Homepath allows for 3% down; VA and USDA are still zero down payment. Conforming loans will allow for a minimum down payment of 3% with private mortgage insurance. Some programs will allow gifts from family for your down payment and/or closing cost. These funds do need to be documented and “paper-trailed” with the donor providing a written letter stating no repayment is expected.

Employment: Lenders need to see a two year job history in the same line of work. Good news if you went to school for your field, this may factor into your job history with supporting documentation (transcripts, diploma, etc.).  Gaps in employment over the past 24 months will need to be explained and second jobs are often not be factored if they have not been held for 24 months or more. 

Income: How you are paid (your pay structure) will impact what lenders can use for qualifying. Those paid an annual salary are the easiest to calculate. Borrowers who are paid hourly with hours varying will probably find their income averaged over the last two years. Self employed or commissioned borrowers will also find their net income averaged over the last two years. If a borrower receives annual bonuses, they will probably need to be received by that employer over the last two years and will be averaged.

You may have strong employment or assets and your credit is “shallow” causing you to have a lower credit score. Or perhaps you need to work on saving up for a down payment and delay buying that new car. This is why it’s important to meet with a mortgage professional as soon as possible. I often help clients who aren’t planning to buy a home for six months or even longer – they want to be prepared to put their best foot forward.

If you’re considering buying your first home, I’m happy to help you! I have been helping first time home buyers at Mortgage Master Service Corporation since April 2000 buy homes in Renton, West Seattle, Redmond, Bainbridge Island and all over Washington state, where I’m licensed to originate mortgages. If you would like me to provide you with a rate quote, click here.

Should I refinance my car before buying a home?

Short answer: probably not. 

Why? The refinance of the car will impact your credit score as if you have purchased a new car. Credit scoring favors established older debt over new debt. Once you have that new loan, even if the payment is lower and interest rate is lower, the established old debt is paid off and eventually loses the positive impact to your credit scores.

Your new refinanced loan will also impact your credit as it will be considered 100% financed of the new loan amount. You don’t receive any boost to your credit for if your car is valued at $20,000 and new your loan amount is $10,000. Credit scores improve once your debt is at 50% of the debt amount and an additional improvement to credit scoring once the debt reaches 30% of the new loan amount.

If you’re refinancing for purposes of qualifying, do check with your licensed mortgage originator first. It’s possible that if you have 10 payments or less remaining, the car payment may not need to be factored into your debt-to-income ratios.

If you can qualify with the current car payment and are considering buying a home, you may be better off delaying the refinance until after your new home purchase has closed.

Do check with your mortgage professional before taking my advice as your financial scenario may call for different actions.

If you are interested in refinancing your home located anywhere in Washington state, I’m happy to help you! 

Charge Offs: All is Not Forgiven

Part of what I do as a mortgage originator is review credit reports. I’m often surprised how many consumers think that a debt that has been charged off means that it has been removed from their credit history or “forgiven”. Basically, a charge off is when the creditor is writing the debt off their books for tax purposes, it is not terminating the debt owed by the borrower. Often times, the charge off may turn into a collection or be sold or assigned to a collection agency and therefore, mortgage lenders will view a charge off on a credit report as a collection.

I while ago, “Betty Bellevue” called me to see if she could help her mom obtain a mortgage. A couple years prior, her mom had a car that she “gave back” to the bank. She thought she would only have a “repo” reflected on her credit report and that enough time had passed to where she might qualify for a mortgage. What she didn’t realize is that even though the bank had the car back, she had a “charge off” for the balance of the car loan on her credit and that for purposes of a mortgage, we would treat it as a collection (it would need to be paid off and removed from the credit report).

Distressed home owners with second mortgages may be surprised to find charge offs on their credit report following a short sale. Borrowers are often caught completely off guard by this remaining damaging debt being reflected on their credit report. Depending on how the lender reports the short sale to the credit bureaus, it may be just as detrimental as a foreclosure. If you are considering a short sale or foreclosure, I strongly recommend you find an attorney who specializes in dealing with this type of situation.  Linda Ferrarri has great information on her credit blog about foreclosures and short sales which I highly recommend if you find yourself facing this situation.

A charge off also dramatically impacts credit scores. Once a charge off, or collection is paid, credit scores will initially drop as the credit scoring modules view it as a “new activity” on the borrowers credit. Eventually scores should recover and improve. If you are considering a mortgage and have charge offs or collections, it’s important to discuss how and when you’re going to pay them off (some can be paid at closing which will prevent your scores from tanking during the mortgage process).  

You can obtain a free copy of your credit report at

Washington State’s DFI (Department of Financial Institutions) guide for home owners who are considering a short sale and Foreclosure Help.

Is My Credit Checked Before Closing

A “soft” credit check is just prior to closing on your mortgage.  This is to ensure that no new debt was obtained during the mortgage process and that the information on your final application that you sign at closing still represents your financial scenario.

A soft credit check does not impact your credit scores. It will disclose any new debts and credit inquiries.  If there are changes to your credit revealed from the soft credit check, be prepared to explain and document whether or not new credit was obtained. Even if the credit card you decided to open during the transaction has not been used, you will still need to provide documentation regarding this new potential debt.

A “hard” credit check may take place if your existing credit report is set to expire before closing. Different than a soft credit check, the mortgage company will order a new credit report and the terms of your mortgage will be impacted by what the new report discloses, including any changes to your credit scores. This includes your current pricing of the loan and qualifying. 

It’s really best to not obtain any new credit during the mortgage process and avoid applying or inquiring for any credit. Even when the creditor states “six months same as cash” or “this won’t impact your credit” – don’t buy it!  If you do feel you need to make a purchase just prior or during the mortgage process, please discuss it with your mortgage professional first. A new car or big screen tv for your home may delay the purchase of your new home. 

Reader Question: Does Getting a Mortgage Preapproval Impact my Credit Score?

One of my Seattle subscribers wrote me to ask this great question:  

“I’m considering purchasing a home soon, but I’m concerned about getting preapproved too early.  If I get preapproved and don’t find a home until the preapproval expires and I need a new one, will the credit hit from the first approval damage the score of my second approval?”

Credit scoring is intended to reflect a persons credit habits. When a credit report is pulled by a mortgage originator, a persons score may go down a few points. The initial pull of your credit report will help determine if there’s anything that needs to be address to help improve your scenario before you find your next home. It’s not uncommon to find that your score may be lower than what you estimated, perhaps there’s a parking ticket, or or a payment was reported late that you’re not aware of. This is the time to find out.

Loan preapprovals generally last around 90 days (this may vary depending on how old your supporting documentation is that was provided to validate your preapproval). Your credit report may not need to be repulled until you have a bona fide offer if at all depending on when your transaction is scheduled for closing.  Sometimes a “second preapproval” can be updated with new paystubs or bank statements.

Credit scoring is accumulative. So if you’ve been shopping for a car or a big screen television, these inquiries compounded with one from your mortgage lender will have more of an impact than just the credit being pulled for a preapproval alone.  By the way, if you’re shopping for new credit before (or during) being preapproved for a new home, be ready to explain every one of your credit inquiries. 

Odds are, if you’re worried about your score dipping from being preapproved you really should proceed with having it pulled by a local, licensed mortgage originator now…just in case a little elbow grease can help pump up your scores. Something as simple as paying down a debt to be under 50 or 30 percent of the total credit line may make a difference for an improved mortgage rate or qualifying for certain mortgage program.

I tend to lean towards getting preapproved as soon as possible. At the very least, it’s an opportunity to develop a game plan to make sure you’re in the best position possible for qualifying for your next mortgage. In addition, I’m seeing more non-distressed home homes in the greater Seattle area that are having multiple offers or “bidding wars”. If you’re considering buying a home, you’re going to need to be prepared with a preapproval letter from a reputable lender. You never know when a home that you want to make an offer on may become available.

If you’re considering buying a home in Seattle, Redmond, Walla Walla or anywhere in Washington, I’m happy to help you with your mortgage preapproval. 

Why It Pays to Get Preapproved Early: You May Think You Know Your Credit Score

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.

Book Review: The Big Score by Linda Ferrari

Ferraribookcover2 Last month I had the opportunity to speak at The Mortgage Girlfriends Mastermind Summit and to meet Linda Ferrari.  Linda is someone who I’ve known of for a long time.  She’s an expert at credit scoring and is passionate about consumers knowing and understanding their credit score.  She is the author of “The Big Score — Getting It and Keeping It”.

This book is a great resource–for young and old alike.  We are impacted everyday by our credit scores and Linda does an excellent job shedding light on mystery of credit scoring.   Her book is structured in an easy to read and research format.   If you need help working on repairing your credit, you’ll find step by step advice in this book.  It could be the best $20 you ever spend.

For the record, I paid for my copy and I am not receiving any compensation for my review.