Did you know 780 is the new 740? For credit scores, that is.
740 used to be the gold standard. If you had a 740 or higher credit score, there were pretty limited Loan Level Pricing Adjustments (LLPA’s) that would adversely impact your rate/fee choices when financing a home. You were golden. That’s now 780, to be golden.
This change happened about a year ago when the FHFA (Federal Housing Finance Agency) updated their LLPA’s for Fannie Mae and Freddie Mac loans.
Why is it important to know the new gold standard for credit scoring? Because it impacts what you pay to borrow money. It can be worth tens of thousands of dollars over your lifetime.
They should fold credit scoring, and credit management into high school curriculum. It’s not hard. But it’s sort of a dirty little secret that nobody thinks about, often until it’s too late. It shouldn’t be that way.
So here’s my effort to shine some light on the importance of credit management, to help you and those you care about, save some money. Whether you have a great credit history and impeccable scores or not, there’s some basic information to know that I hope helps:
- Roughly 35% of your credit scoring is based on your overall credit history, the number of credit accounts you have, and those that have been in good standing vs. those that have been delinquent.
- The next big chunk, roughly 35% of your credit scoring, is your ratio of available credit, to credit in use. You want to show you have available credit, that you’re not using.
- The final 30% or so is a combination of generally less important factors, including length of credit history, number of revolving or installment accounts, and number of new credit accounts.
If you’ve got great credit? Fantastic. Keep it up! And, you can stop reading, unless you’re into this sort of thing. Or, if you want to share this insight with people who could benefit from it.
There are several resources you can use to check your credit history, and credit scores, so you can work to improve them. For mortgage purposes, we use the lowest middle score of all borrowers.
www.annualcreditreport.com is the only site authorized by all three credit bureaus to get your free, annual credit report. You won’t get your credit scores, unless you pay to upgrade, but you don’t necessarily need them.
You can use www.annualcreditreport.com to run your credit, for free, one time a year, and see all your credit accounts, aka tradelines, and see how they’re reporting. If there are mistakes or inaccuracies, they offer an interface to have them disputed and fixed, if you can provide appropriate documentation.
There are numerous other services, many of them free, whether from your own credit cards, the credit bureaus directly, or services like Credit Karma, that will show you your scores. Unfortunately, based on my experience, the scores you get from those services – even when paying for them – are rarely in line with what we see when we run a mortgage inquiry. They can be indicative of a range, but don’t put too much stock into the scores they tell you (so don’t pay for that service, use the free ones). The Consumer Financial Protection Bureau has actually been working to tighten that up, but as you can imagine, there’s some resistance.
But the good news is, you can use those free services to have a baseline measurement and monitor the direction you’re headed. That’s the key. The higher credit scores you have, the better and less costly financing options you’ll have, whether that’s for buying a home, a car, or any other form of credit.
So what do you do if your credit profile isn’t great? It depends on your specific circumstances, but there are some general rules of thumb, some of which are obvious, and others may be less so.
IF YOU HAVE DELINQUENT ACCOUNTS OR COLLECTIONS:
- Get current on any delinquent accounts. If they’re still open, do not close them.
- Don’t miss payments going forward. If you run into financial trouble, call your creditor/s and ask what options you may have to defer payments so they won’t be reported late and/or avoid going into collections.
- If you have collections, those may or may not be an issue. If they’re large, lender guidelines can require they be paid, or that a payment plan be established, in order for you to qualify to buy a home. But, that’s often on a case by case basis, based on the number, size and total balances of collections.
- One thing you can try doing is calling the creditor/collection agency, and without admitting it’s your account, ask for a Pay for Deletion Agreement. That means that the creditor and you agree on an amount they will accept for payment, and in exchange, they will delete the collection from your account. They will often accept a lower payoff amount than the full balance owed. You need to get that in writing. Then pay it off, and it should be deleted from your credit history. Keep your paper trail. If they don’t delete it from your credit, that’s something you can have done using a service like www.annualcreditreport.com and providing them the paper trail showing the creditor agreed to Pay for Deletion, and the amount was paid. If they won’t accept Pay for Deletion, just leave it alone, for now.
TIPS TO BOOST YOUR CREDIT SCORES:
- Don’t carry balances on your credit card accounts that are high, relative to your limit. Even if you’re paying off your credit card/s in full each month, carrying balances within the month that are high relative to your limit can depress your scores, and/or keep them from rising.
- If you can, pay off your credit card/s, and don’t use them for a billing cycle or two. In some cases, it can also help to pay your balances down to say $5 or $10, vs. paying them off in full, but this can depend on your total number of accounts, balances, etc.
- Don’t close any credit card accounts once they’re paid off. If you don’t want to use them, put the cards away or cut them up. Closing them reduces your available credit to credit in use ratio, which will depress your scores.
- If you’ve had credit cards for a while, and have never missed a payment, you can call your creditor/s and ask them to increase your limit. You don’t want to use that new limit, but it helps your ratio of available credit to credit in use, without paying down the existing balances. Still, paying them down or off will serve you best.
- Paying off installment accounts in full will help boost your scores (car loans, appliances, student loans, etc.). But, making timely payments on installment accounts also helps.
- Establish new credit in good standing. If you already have two, three, or four credit accounts in good standing, you probably don’t need to do this, you just need to pay those off to improve your ratio of available credit, to credit in use. But, if your credit scores are pretty bad, or if you’ve suffered a major derogatory event, or if you’ve never had any real credit, you may need to establish new credit in good standing.
- Get a secured credit card. If you cannot qualify for a credit card or installment account because of your credit history and scores, you can almost always get a secured credit card that will report to the credit bureaus. Most banks offer these, and there are now online banks like Chime and others who will too. You give them $200 or $500 or whatever, and that is your credit limit to charge against. Follow the same rules as with any credit card. Don’t ever charge more than about 30% of your limit, and certainly don’t charge more than you can pay off each month. Pay it off when you get the bill. Don’t use it for a month. Repeat.
- Once you’ve established some positive credit history, you can go get one or two more accounts, and follow the same guidelines.
- If you have a limited credit history and use of credit, you can also see if your rent payments, cell phone or utilities can be reported on your credit. Those can be used to help establish a positive credit history, as well.
Now, back to why does this matter to you?
If you were buying a home, and either you’re not a first time homebuyer, or if you were, your income exceeds the threshold that allows for the LLPA (loan level pricing adjustment) waiver, and you had a 780 credit score, with 20% down, on a $500,000 purchase, with $400,000 financed, you would face a $1500 pricing adjustment (.375% of the loan amount) that would either be a cost for a given rate, or you could slide up in rate maybe .125% to absorb that cost.
If you were in that exact same scenario, but with a 700-719 credit score – which is ok but not great credit – you would face a $5500 cost for a given rate, or you’d have to slide up maybe .5% in rate to absorb that incremental cost. That would increase your monthly payment by $135/mo or so. No matter how you slice it, $4000 is real money, as is an extra $135/mo for however long you’re in that loan.
If you were in the 740-759 credit score bucket – which used to have a .5% adjustment for this scenario prior to the LLPA updates last year – you would face a .875% ($3500) price adjustment, or shift up in rate maybe .25% or .375% to absorb the incremental cost. So, that’s a $2000 difference in costs, or maybe $75-$100/mo or so if you opt to shift up in rate, to absorb that cost. Again, that’s real money.
The adjustments to LLPA’s are even more stark when considering refinances vs. purchase transactions. Additionally, the further down the credit score spectrum we go, they become increasingly expensive. It’s real money.
Everyone knows having better credit makes borrowing money less costly. Now, hopefully, you have some tools to do something about it.
Another tool, at least for financing a home, are government loans, like FHA, USDA and VA loans for eligible veterans. They’re designed to make homeownership more accessible and affordable to a broader array of people. So, for the most part, there really aren’t significant Loan Level Pricing Adjustments for having marginal credit and/or low down payments.
That’s why, in a lot of cases, even if you have pretty good, or even very good credit scores, FHA, and VA loans (if you’re an eligible veteran) in particular, are a great option that can be more cost effective than conventional financing.
USDA loans can be useful too, but unlike FHA and VA loans, they have property specific and income restrictions, which make them less widely available than FHA loans or VA loans.
I talk to a lot of people, every day, across a broad spectrum of income and socioeconomic levels who really don’t know how to manage and improve their credit scores. It’s almost one of the best kept secrets on the planet. Because it allows creditors to make more money on you, if you don’t know how to manage and boost your credit scores, but still need to borrow money. I’m here to help fight back.
With that, here’s your snapshot of where rates ended this week. Call or email if you, your family or friends have any questions or would like to discuss refinancing, or buying a home. Cheers!
E
| Conforming | Rates | Points | APR | Loan Amt | Payment | ||
| 30 yr fixed mortgage | 6.750% | 0 | 6.800% | $ 300,000.00 | $ 1,946 | ||
| 15 yr fixed mortgage | 6.375% | 0 | 6.425% | $ 300,000.00 | $ 2,593 | ||
| 5/6 ARM | 6.000% | 3.75 | 6.250% | $ 300,000.00 | $ 1,799 | ||
| 7/6 ARM | 6.000% | 4.375 | 6.325% | $ 300,000.00 | $ 1,799 | ||
| Jumbo (ask me about Super Conforming limit, per your zip code) | |||||||
| 30 yr fixed mortgage | 7.125% | 0.5 | 7.155% | $ 1,200,000.00 | $ 8,085 | ||
| 15 yr fixed mortgage | 7.500% | 0.5 | 7.670% | $ 1,200,000.00 | $ 11,124 | ||
| 5/6 ARM | 7.125% | 0.75 | 7.379% | $ 1,200,000.00 | $ 8,085 | ||
| 10/6 ARM | 7.500% | 0.75 | 7.745% | $ 1,200,000.00 | $ 8,391 | ||
| Rates subject to change without notice. | |||||||
| Please keep in mind, these rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics (780+ fico, owner occupied SFR with 75% loan to value ratio or less and $200,000+ loan amount), your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. NMLS: 239756. Equal Opportunity Housing Lender. If you’d like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:eric@ezmortgages.us and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject. | |||||||