This guide will cover how to increase credit scores to qualify for a mortgage. Attempting to increase your FICO can sometimes feel like navigating through a rough jungle. It is practically disorienting! Angie Torres, the National Operations Director of FHA Lenders For Bad Credit, explains how to increase credit scores to qualify for a mortgage as follows:
The most basic concepts about credit have not been taught in schools. So, when you want to buy a home and are looking for a loan, you are introduced to this as a complete first-timer without any knowledge whatsoever. The good news, though, is that improving your FICO score is not as challenging as many people assume, and with a bit of work, you can master your credit and increase your FICO score. In this article, we will tell you what you can do to improve your FICO and why it matters in the first place.
Why Credit Scores Are Important For Mortgage Loan Applicants
Why does having good credit scores matter? At some point in our lives, we will likely need to borrow money for whatever reason we might have. Credit scores are important for consumers. The main reason why credit is important for consumers is interest rates are based on the applicant’s credit scores. Alex Carlucci of FHA Bad Credit Lenders explains the importance of credit as follows:
Credit is important for consumers buying high ticket goods and services. Some would borrow money for school, others to buy a car, while the majority would borrow as mortgages to purchase homes. Regardless of why you need to borrow money, your credit score will play a critical role in determining whether or not you qualify for the loan. Besides your ability to borrow, it will affect the interest rates charged or offered.
Essentially, having a higher credit score means that you can get any loan at the best interest rates, and on the other hand, lower scores make it difficult for you to obtain any loan.
What Do Mortgage Lenders Consider a Good Credit Score
There are different levels of credit scores, and the difference between these scores could mean so much money incurred by the borrower. For instance, for a loan of $350,000, the difference between top and lower credit scores could mean paying up to $100,000 in interest over the loan term. This is to tell you there is a lot of money that you can incur simply by not choosing to improve your FICO score.
In addition to reduced interest rates, solid credit will allow you to get the best loan perks. Many employers will run credit checks for hiring new employees. Companies also run credit reports on candidates for promotion. Mortgage loan originators need good credit. Regulators view mortgage loan officer candidates with bad credit as having financial responsibilities.
Bad credit can go as far as directly affecting your career, as some employers check credit scores as they move candidates through the hiring process. With that said, you see why your FICO score is so crucial.
How To
What to increase your FICO score? Now that we have looked at why increasing your FICO score is so important, here are a few steps that you can take to get the score moving in the right direction:
Ensure that everything on the credit reports is accurate. Let’s face it, trying to improve your credit without examining your credit reports is similar to embarking on a road trip without a GPS. It is very important always to check your reports to ensure that there are no mistakes that would affect your FICO score. You can get your credit report from any credit bureau or all three and then carefully
examine them to ensure that everything reflected therein is accurate. A recent study by FTC showed that one in four individuals usually identifies errors on their credit reports, directly affecting their credit scores. This is to say that credit report mistakes are pretty common, and for this reason, anyone looking to increase their FICO scores should start by going through the reports to ensure that there are no mistakes. And if you find any errors, contact the bureaus directly to have the error rectified. This action alone may quickly increase your credit score.
The Importance of Making Timely Payments
Make timely payments – a borrower’s payment history is the most crucial factor in FICO calculation. Not paying your credit account or making late payments will hurt your score. Dale Elenteny of FHA Bad Credit Lenders explains the importance of timely payments in the past twelve months as follows:
Remember, a late payment might remain on your report for up to seven years. Paying on time gives lenders comfort and assurance that you are a responsible borrower of your money. But if you have a history of late payments, you might have a serious problem qualifying for a loan, and if you are looking to increase your FICO score, you must change this pattern the soonest.
You don’t have to pay your cards in full monthly – even though this would be the best approach – but making minimum payments regularly will ensure that your accounts remain in good standing. Setting automatic payments for each account would be the best solution for those with many accounts that need to be paid monthly and have trouble remembering all of them.
What Is Credit Utilization Ratio and How It Impacts Credit Scores
Lower credit utilization – when calculating your FICO score, the amount of credit used as a percentage of the total credit is also considered. If you have a credit card with a $3000 limit, and the available balance is $1500, credit utilization is 50%. Alex Carlucci, a top loan officer at FHA Bad Credit Lenders explains credit utilization ratio:
The lower the utilization, the more attractive a borrower would be to the lender. This would signal that the borrower is not overly extended, and if they get credit, they are more likely to use it responsibly. In most cases, a utilization rate of 35% is encouraged, even though one below 25% is ideal. Because as we said, the lower the utilization rate, the better.
According to a recent report from FICO, borrowers with a FICO 8 score of 785 or above had an average utilization rate of 7%. One way to lower the utilization rate would be to ask for a credit limit increase, and even though it won’t be easy if you can achieve it, it would massively impact your credit score. Also, please remember that taking out more credit is not a good idea, especially if you have a propensity for spending.
How Collection and Charge-Off Accounts Affect Mortgage Approval
Outstanding collection and charge-off accounts do not have to be paid to qualify for a mortgage if the date of last activity is older than 12 months old. If you have recent collection or charge-off accounts, you can see if you can do a pay-for-delete. Taking care of the accounts in collections with pay-for-delete on smaller petty collections. John Grimaldi of Superior Lending of Las Vegas explains about having collections when qualifying for a mortgage:
Pay small unpaid accounts only if the creditor will do a pay for delete. Collection accounts can negatively impact your credit score but do not have to get paid to qualify for a mortgage. Your credit score generally reflects your financial health, so if you have any accounts in collection, this will affect your score. The older the collection account, the less impact it has on the borrower’s credit scores.
Collection accounts typically appear on a borrower’s credit report when a debt has been turned over to a collection agency by a creditor due to non-payment. A collection account on your credit report indicates that you may have had difficulty repaying debt in the past. And your score is affected since payment history plays a big part in FICO score calculations. In addition, collection accounts can stay on your credit report for up to seven years, making it more difficult for you to obtain new credit or loans soon. Lenders and creditors may view these accounts as a sign of financial risk. Mortgage underwriters may view mortgage loan applicants with recent collections and recent late payments as financially irresponsible and be less likely to extend credit to you. So, it is best if you avoid having collection accounts in the first place by ensuring that your bills are paid on time. But if you already have collection accounts, negotiate with the collection agency to settle the debt, remove it from your credit report, through pay-for-delete, and increase your FICO over time.
Optimize the account age, credit inquiries, and credit mix – last but certainly not least, the age of your accounts, your account variety, and the number of new inquiries into the credit are the remaining components of the credit score algorithm. You will have to optimize for your FICO score to increase. The thing is, as your account’s average age increases, your credit score also improves. Having more established accounts prove to the lenders that you have maintained credit for a longer period, making you a better borrower. We are not telling you not to open new accounts or close your newest cards, but you need to be conscious of how many new accounts you have, especially if you are planning to apply for a mortgage, where you need to have high FICO scores. Other than the account’s age, having various types of accounts is seen as favorable. So, if your credit record isn’t that big, you may want to submit utility payments to the credit bureau to be included in the report. Finally, the number of times a lender checks your credit may also impact your FICO score. Additional inquiries may affect your report by as small as five points, which may seem insignificant. Still, borrowers whose FICO scores are close to the next tier of scores, either on the downside or upside, could affect their ability to qualify for a specific mortgage.
Bottom line
Increasing your FICO score is essential to achieving financial stability and securing better loan and credit terms. Following the steps outlined in this article will gradually increase your FICO score over time. Even with all this said, building credit habits that eventually boost your FICO takes time and effort. But considering the long-term benefits of a higher FICO score, the effort is worth it. So, take control of your credit now and set yourself up for a brighter future!
