Homebuyers: Quickly repair your credit with a rapid rescore
By Dawn Papandrea
April 30, 2015
In many cases, people applying for a home mortgage are banking on having a certain credit score in order to be approved and qualify for an attractive interest rate.
The problem that often arises is that unless you're in the good habit of reviewing your credit reports and FICO scores regularly, you could be in for a rude awakening at the worst possible time — when you're ready to move forward with your home purchase.
Normally, any recent, positive credit behavior that ensures a good score takes at least 30 days to be reported to the credit bureaus and reflected in your credit score — the kind of time you don't have if you're trying to lock in an interest rate or go into contract on a home. Lucky for some home shoppers, a process known as “rapid rescore,” in which you make an improvement to your credit file and get an updated credit score in a short period of time, could be your “get out of jail free” card.
Chris Allen, a loan originator for Caliber Home Loans in Texas, says he's been able to help clients bring up their credit scores as much as 50 points within 72 hours. Of course, this is not something that all prospective homebuyers can achieve.
“The bottom line is if you have bad credit because you don't pay your bills on time… then you'll need to deal with credit repair over six to nine months, or a year. But if you can pay off a bill or restructure a little debt, that's a real simple process that can bring up your score quickly,” he explains.
Here's how it works: A potential homebuyer applying for a mortgage may discover that there's information on her credit report that is making her score lower than it otherwise would be. “For example, you may have a large debt that is knocking some points off your score,” says Jeff Scott, spokesman for FICO, the dominant scoring model. With a rapid rescore, you could quickly pay off that balance if you have the means to do so, and instead of waiting for the typical 30-day reporting cycle, mortgage lenders will work with the creditor who received your payment to get that information reported immediately. “Once that outstanding debt is reported as paid off, the mortgage lender may then pull a new credit score, and it's likely to be higher,” says Scott.
“A minor improvement can mean the difference between being able to buy a home or having to go back to renting while you wait for your credit score to improve using traditional methods.”
–Paul Cano, Absolute Mortgage
Paying a chunk of card debt is probably the most common way to achieve rapid improvement since it impacts one of the key factors that makes up your score: your utilization ratio, which is how much debt you are carrying compared to how much available credit you have. For example, if you have $40,000 in available credit and you are using $30,000, your utilization is 75 percent. “That's quite high and may have a negative impact on your FICO score,” Scott says. “But if you can pay that down to $10,000, you now reduced it to 25 percent, and there's a good chance that your FICO score will be positively impacted.”
Another route to a higher score involves the mortgage lender working with a creditor directly. “If there's a collection or late payment, sometimes those creditors are willing to write a letter to the bureaus asking to remove it,” says Allen. This works best if you've had an account in great standing, but missed one payment at some point. If you talk to the right people, they are willing to help, says Allen.
If you're wondering why you should even bother trying to raise your score a few points, keep reading. “There are different cutoff points for each lender, and it's possible, even likely, that a 30- 40-point jump in your credit score will move you up into a higher tier, and therefore a better or lower interest rate,” says Scott. Over the course of a 30-year loan, having a lower interest rate and monthly payment can translate into thousands of dollars in savings.
Scoring a better interest rate isn't the only reason to attempt a rapid rescore, however. “The homebuyers who would most benefit from this are those who are on the verge of qualification, or those who need just an increase of a few more points to qualify,” says Paul Cano, mortgage adviser with Absolute Mortgage in California. “A minor improvement can mean the difference between being able to buy a home or having to go back to renting while you wait for your credit score to improve using traditional methods.”
One last thing to know is that rapid rescoring can only be done by a lender, so you as a consumer won't be able to move through this process on your own. This service does usually incur a fee (which varies, but can cost up to about $200), which the lender will usually roll into the mortgage.
Although rapid rescoring is a great fallback option, ideally you'll never have to rely on it. “We found that people who know their FICO score tend to have higher ones because they see where their deficiencies might be and can improve their scores,” says Scott. In other words, in the months before you plan to buy a home, you should get a sense of your credit standing and aim to make improvements on your own while you have time on your side. You can check your credit reports for free once a year at AnnualCreditReport.com, and you can pull your FICO scores for about $20 each at MyFICO.com.
Still, if you're teetering on the edge of a better interest rate or qualifying at all, it's worth inquiring with your potential lender if a rapid rescore could benefit you.