Good Credit Score Basics
Learn about Good Credit Scores and Credit Reports, plus the Impact they have on
Home Loan Refinance Mortgages.
In addition to income and amount of home equity, your credit score is a major determining factor in the types of refinance home loans you qualify for, and the resulting mortgage rates. Credit scores also affect qualification and interest rates for many other things such as credit cards, auto loans, personal loans, etc.
When refinance mortgage lenders inquire about your credit score, they are referring to your FICO credit score developed by Fair Isaac Corporation. FICO credit scores range from 300 to 850 with most people scoring in the 600’s to 700’s. Higher FICO credit scores result in lower mortgage rates. Home loan lenders get your credit score from the three major credit bureaus: Equifax, Experian, and Trans Union.
It's a great idea to check your credit scores before you contact a lender, whether it be for a mortgage, auto, personal loan, or any type of loan.
Major factors influence your credit score, such as your timely payment history, how much you owe, length of credit history, number and type of accounts, and mix of credit.
A Few Ways to Build a Good Credit Score
Pay your bills on time: Although there is some debate on the percentage impact on credit scores relating to bill payment history, most will agree that it has the largest impact on your credit score. Bill payment can factor up to 35% of your credit score! The good news for those with relative low credit scores is that your recent payment history carries more weight than previous years payments. Making your payments on-time is a powerhouse strategy to get your credit scores up.
Also consider that missing payments and paying late can devastate your credit score. The better credit score you have, the bigger the impact. For instance, missing just one payment can knock up to 100 points off the credit score of an individual with excellent fico credit score of 720 or more. Missing payments for an entire month can reduce an excellent credit rating to a poor rating in an instant. This can result in your nice 723 fico credit score being reduced to a credit score range of 578 to 648.
Pay down your credit balances: The credit reporting agencies like to see a low balance of 30% or less of the total credit limit for each credit account. For instance, for a credit card account that has a limit of $1000, the individual will notice a negative impact on their credit score if they maintain a balance over $300. Likewise, the more that you pay off of each account, the better the credit mix, which results in a better credit score. If you plan to refinance in the next year or so, it would be to your advantage to start paying off those balances now.
Keep paid-off accounts open: Contrary to what you may have been told in the past, it is actually a good idea to keep your paid-off accounts open, even though you are no longer using them. Closing these accounts will lower your total credit available, which in turn, makes existing balances a larger percentage of total credit available. A higher ratio of credit balance to available credit will have a negative impact on your credit score.
Closing old accounts can shorten the length your credit history and also have a negative impact on your credit score.
Credit Scores and Mortgages
When you apply to refinance, home loan lenders will almost always use your “mid” FICO credit score as your qualifying credit score. The lender will order your credit report from Equifax, Experian, and Trans Union, and utilize the middle credit score of the three as your qualifying credit score. So, if you have a 617 credit score from Experian, 685 credit score from Trans Union, and a 648 credit score from Equifax, your qualifying “mid” credit score will be a 648 FICO.
Credit scores can have a major impact on the mortgage rates you receive for refinance. As an example, there can be as much as a 3 full percentage points difference in rates between a qualifying 580 FICO credit score and a 720 FICO credit score. This can result in tens’s of thousands to hundred’s of thousands of dollars in additional interestover the length of the home loan depending on the loan amount and loan term.
Your FICO credit score also has a big impact upon the total loan amount that a refinance lender will allow an individual to borrow. For instance, a 620 credit score may allow one to borrow only 80% to 90% of their home’s value, depending upon the lender programs available. A 780 credit score will allow an individual to refinance up to 95% of their home’s value with most conventional home loan refinance lenders.
Don’t despair if you have a poor credit score and wish to qualify for a conventional mortgage. You can improve your credit score over time by improving how you handle credit.
Today, most people do not stay with their mortgage for the entire term. In fact, many people refinance with low scores to improve their current situation and move to a new home loan once their credit scores have improved.
Those with poor credit scores as low as a 620 mid ficonow, can get low mortgage rates with a FHA refinance. In fact, those that qualify may receive lower mortgage rates than a comparable excellent credit qualified conventional refinance mortgage!
Mortgage Lates and Credit Reports
Tough financial times can lead to incredible stress at bill time. It’s a tough reality that in many households, a decision has to me made as to which bills to pay now, and which ones will have to wait. Unforeseen expenses, medical bills, and divorce, among countless other situations can cause otherwise very credit-worthy individuals to struggle financially on a monthly basis.
Those looking to get back on their feet with the aid of a home loan refinance should make every effort to pay their mortgage payment on-time. Late mortgage payments are reported to the credit bureaus and will have a potentially devastating effect on your refinance plans. Even with a qualifying credit score, many refinance lenders will deny any home loan for an individual that has a mortgage-late on their credit report.
Secondly, those refinance lenders that will allow mortgage-lates, will charge a much higher mortgage rate as opposed to those with no late mortgage payments, resulting in higher monthly payments and thousands in additional interest expense over the term of the home loan.
Furthermore, mortgage-lates will lower the amount that a refinance lender will allow an individual to borrow, sometimes as low as 60% to 70% of the home’s value.
So you can see that every effort should be made to make the mortgage payment on time before you refinance. It is also important to note that most refinance lenders will only be looking at your previous 12 months mortgage payment history pertaining to mortgage lates, so if you were late on the payment 13 months ago, you should not be negatively affected.
Collections and Judgments/Liens
Collections and Judgements are also reported to the credit bureaus, and can be the reason for a denial on an otherwise eligible home refinance. Many people don’t know that such items are showing on their credit report until they apply for a refinance. Some are unaware because the entry has been reported in error. Unfortunately, erroneous collection and judgement entries are quite common. In the event of an incorrect collection or judgement on your credit report, you must contact the entity reporting the incorrect information to the credit bureau, and obtain a “satisfaction letter” to prove that the account is in good standing before your refinance can close.
Collections: When an account goes to collection it is usually past 90 days late. Many lenders will not count a medical collection against you, but it may need to be paid-off before your loan can close. A collection can stay on your report indefinitely until it is paid off. A paid-off collection can stay on your credit report as a “Paid Collection” for another seven years. Sometimes, a collection has been paid, but still reports as unpaid on the credit report. In this instance, the borrower must obtain a “Letter of Satisfaction” from the creditor to prove that the account is satisfied, prior to the closing of the home loan. Most likely, legitimate and unpaid collections will need to be paid off and proved with a satisfaction letter before the closing of the home loan. There are also instances where a mortgage lender will allow proceeds from the refinance to pay-off and satisfy the debt in question.
Judgements: Judgements and Liens may not necessarily have a huge impact on your credit score in some cases, but can severely impact your ability to refinance into a new home loan. Many judgements and liens take priority over new mortgages. It is for this reason that title companies will not insure the title and lenders will not allow a refinance with open judgements and liens. To get an approval of a new home loan in this instance, you will need to pay off any liens or judgements showing on your credit report and submit the satisfaction letter for proof of payment, or show proof that you have been released from liablilty. Again, there are also instances where a lender will allow proceeds from the refinance to pay-off and satisfy the debt in question.
Chapter 7 and 13 Bankruptcy, Foreclosure
Chapter 7 and 13 Bankruptcies are reported to the credit bureaus and will show on the credit report as well as Foreclosures.
Chapter 7 Bankruptcy: In order to refinance for a new home loan after filing for chapter 7 bankruptcy (BK), you will usually have to show proof that the BK was discharged at least 24 months prior. Also, you may need to submit your BK Schedule “F”, showing proof of the accounts settled in the bankruptcy. A good credit score with no missed mortgage payments in history can give you favorable terms with a new refinance. There may be LTV (Loan to Value) restrictions depending upon the loan program.
Chapter 13 Bankruptcy: Those currently in a chapter 13 bankruptcy, must be at least one year into repayment with all payments being made on time to be eligible for a new refinance. Also, the borrower must receive permission from the court and have re-established good credit. A minimum period of 24 months must be elapsed before refinancing in most cases, if the BK has already been discharged. Proof of discharge and supporting settlement schedules will also need to be submitted. Again, there may be LTV (Loan to Value) restrictions depending upon the loan program.
Foreclosure: Those who have gone through a previous foreclosure, most lenders will require at least a 3 year waiting period before they can buy a home or refinance. In the instance of an FHA refi, the foreclosure must be the result of an extenuating circumstance and must be documented.
Need Help With Your Refinance?
You now know what makes up credit scores and how that can affect mortgage rates. So, where do you go to find the best refinance options for your particular credit score? Is there really a difference? Yes, there is a difference, and choosing the right lender can save you hundreds monthly and multiple thousands over the term of your new home loan.
We Do Things Differently!
When you submit a request for a Free Rate Quote with the Refinance ToolBox, you only get One Call, from your assigned mortgage refinance professional. You will not have to live the hassle of the 10’s to 100’s of calls you will receive from the other typical “Free Quote” sites.
Instead of the offer for competing refinance lenders to contact you individually, we shop the lender's mortgage refinance rates for you, and zero-in on the most beneficial programs offered for your specific home loan scenario!
I Have a Good Credit Score.
What is my Best Refinance Option?
A good to excellent credit score will qualify you for the greatest number of refinance home loan options at the most competitive mortgage rates offered.
Simply put, you should get low competitive refinance rates from a broker affiliated with current major nation-wide investors competing against one another for your business.
A company using the latest Lender Quote Retreival Software to pull current competing refinance lender programs offered for your qualifying loan scenario can give you a distinct refinancing advantage.
Lenders that utilize technology, streamlined processes, and a low overhead business model can create a winning combination for a low rate and fee refinance loan for you!
The Refinance Tool Box professional works to find low mortgage rate and closing cost lender programs for your exact home loan scenario, and are available to you, should you decide to get a Free Rate Quote with us Today!
My Credit Score is Not Perfect. What is my
Best Refinance Option?
The Refinance ToolBox can help those with poor credit scores, As Low as a 620 FICO Score.
We understand that everyone's credit score is not perfect. In many cases, credit scores are affected by reasons beyond your control. Maybe you have had emergency expenses, sudden medical bills, increased tuition, and on and on. These unforeseen bills may be causing you to miss payments and make your credit score fall.
For those that have credit scores below a 620 mid fico, you might want to check with a credible credit repair company to help boost your score up, while eliminating derogatory items from your credit report. This will not only help for your mortgage refinance approval, but also for all other forms of credit you may need in the future.
The Refinance Tool-Box would like to help those with falling credit scores as low as a 620 to get a refinance home loan that will help the situation immediately and also to make sense for the future. We can help you with your refinance home loan and qualify you for low competitive current mortgage rates.
Those with poor credit scores as low as a 620 mid ficocan now get low mortgage rates with a FHA refinance. In fact, those that qualify may receive lower mortgage rates than a comparable excellent credit qualified conventional refinance mortgage!