Did you know that your credit score affects what you will pay for a mortgage?
A borrower with a credit score below 700 will experience a surcharge to obtain their loan.
This charge is known as “risk based pricing,” and the cost increases as the credit score declines.
Federal Housing Administration financing has the smallest charge, a mere quarter point for credit scores below 660. Conventional financing on the other hand, has several pricing tiers.
Translating this information into dollars, someone applying for a conventional $200,000 mortgage with a 699 credit score will have a surcharge of 2 5/8 points and will pay $3,500.
Another borrower with a credit score of 740 will only pay $500 in fees with a quarter point. Clearly, there is a significant value in maintaining a high credit score.
Most consumers know that late payments and numerous credit inquiries will have some affect on score.
Obviously, a 30-day late payment is less damaging than a 60-day late payment.
Collections, charge offs and the like create bigger impacts to a credit score, but maintaining a clean payment history after such actions will eventually cause the score to rise.
Other influences, though minor, include maintaining a revolving balance that is more than 50 percent of the high credit limit on your card. Closing accounts will also cause your score to decline temporarily.
If you are applying for a mortgage, leave those dusty old accounts sitting on your report. They are not hurting your score.
Recently, a client with superior credit had a misunderstanding over a medical bill.
Thinking their insurance would pay the tab, this individual ignored the bill when it came in and the account was quickly turned over to collection.
Pulling a credit report six months after that incident, my client’s score has dropped from 775 to 685. The cost of his mortgage has increased by 1.5 points.
His reaction to this event was to dispute the physician’s decision to immediately turn the account over to collection. Unfortunately, I had to advise him against such an action.
Recent policy changes have made disputed accounts the quagmire of credit scoring. If a dispute appears on the credit report for a conventional loan, it must be removed and a new credit report must be ordered.
For FHA loans, this policy may be waived for debts under $500 that have been outstanding for more than two years. Otherwise, the dispute must be removed and a new credit report must be pulled.
Why is that? Well, when an account is in dispute it is off the radar of the credit scoring mechanism.
Credit counselors have used this sheltering effect to raise credit scores and the lending industry has put its foot down.
As a result, when disputed accounts are removed the data on that account is now in view.
Often, the newly reported information is not flattering and it has the net effect of lowering the credit scores.
In one recent case, a client with a 730 credit score removed the disputes on three accounts. When the credit was re-pulled and those accounts were now factored in, the credit score had plummeted to 630.
In conclusion, seek guidance from your loan officer if there are items of concern in your credit file.
David Ryland is the acknowledged dean of loan originators at Big Valley Mortgage in Roseville. He has 30 years of experience as a loan officer, manager, trainer and mentor. He can be reached at dryland@apmortgage.com.
