4 Credit Score Tips for a Better Mortgage
By Eva Norlyk Smith, Ph.D.
November 1, 2011
Question: How much will you save over the life of a $200K mortgage if you have excellent credit versus borderline credit?
Answer: More than $67,000.
That’s how much consumers with top FICO scores of 760 to 850 would save on a 30-year mortgage at current interest rates, compared to consumers with credit scores of 620 to 639, the lowest range that still qualifies people for a mortgage.
Even consumers with scores in the 700 to 759 range — which is still considered excellent credit — would pay an estimated $9,000 more over the life of the loan compared to those with top scores, according to the Loan Savings Calculator at myFICO.com.
With mortgage rates at historic lows, many people are eyeing a refinance or taking out a new mortgage. But before you rush out to apply for a low rate mortgage, it can pay off big time to spend some time working on your credit score and making sure it is at its best.
That could mean waiting six to twelve months before sending in your application. However, taking the time to get the very best terms can lead to major savings over the long run.
Here are four tips to spruce up your credit score and get the best rates.
1. Avoid window dressing your credit report.
Most consumers know that carrying high balances on their credit cards will pull down credit scores. As a result, many people aggressively pay down their credit card balances just before applying for a loan.
However, window dressing your credit report like that can backfire, according to Maxine Sweet, Vice President of Public Education at Experian. While paying down credit balances does improve scores, dramatically changing the way you use credit may backfire.
“In some cases, right after consumers pay down balances, the credit score will take a slight dip, because you have changed the way you use credit,” says Sweet. “The way all the parts mix together is different, and that can cause the score to be lower. It doesn’t happen to everyone, but you are better off paying down debt three to four months before applying for a big loan.”
2. Stabilize your credit usage.
Along the same lines, Sweet recommends, it’s important to stabilize your credit report and the way you use credit. Banks hate uncertainty, so don’t apply for new credit cards or other loans during this time and don’t close existing credit accounts. Overall, aiming for consistency in credit usage before applying for a mortgage is key.
“Get everything stabilized in the three to six months before applying for a major loan,” says Sweet. “Don’t close accounts, don’t apply for new credit cards, avoid major swings in your account balances. Stabilize everything.”
3. Fix errors on your credit report.
Small mistakes on your credit reports can have a big impact on your credit score. Obviously, you want to check for glaring inaccuracies, particularly on collections or other bad marks that can seriously ding scores.
However, minor mistakes can have a big effect as well. For example, if a card issuer is not reporting the card limit on one of your credit cards, it can be a problem. Because that limit is not included in calculating your credit utilization ratio, it can make it look like you’re using more of your available credit than you really are and pull down your score.
To check, pull a free copy of your credit report at AnnualCreditReport.com (you’re entitled to a free report from each of the major credit reporting agencies once a year). You have to pay to get a copy of your credit score at the same time, but if you’re in the market for a mortgage, that’s an investment well worth it to know where you stand.
4. Do shop around.
Many consumers are afraid of shopping around when applying for a mortgage because they are concerned that multiple credit inquiries will damage their credit score, says Sweet.
However, credit scoring models take into account the fact that consumers will need to apply for a mortgage with several banks in order to take advantage of the best available offers. Rates can vary by more than 1 percent from bank to bank, particularly if you’re dealing with a local bank or credit union.
According to Sweet, both the FICO scoring model and VantageScore allow for multiple credit inquiries during a one to two week window for consumers applying for both mortgages and car loans.
An inquiry after that window has closed could lower scores slightly. But hopefully, by then, you’ll have long since decided which mortgage lender is for you.