Improve Your Credit to Get the Best Mortgage

You know you should check your credit and your credit score before getting a mortgage. But if you are like many of us, reviewing your credit report and credit scores ranks up there as just about as fun as a visit to the dentist. The difference is however, you pay the dentist big bucks for the hour or two you spend in the chair, while spending a couple of hours with your credit report can save you hundreds or thousands of dollars on your next loan.

When it comes to home loans, credit reports and scores are used to help:

• Determine which loan program you qualify for,
• Determine the interest rate you'll pay for the loan,
• Set your rate you will pay for Private Mortgage Insurance (PMI) if it is needed on a low down payment loan,
• Determine what discounts you will qualify for on homeowner's insurance.

First a quick overview of credit scores and mortgages: Unless you are getting a private mortgage, the lender will require a three-bureau residential mortgage credit report (often referred to in the industry as a "tri-merge"). These reports are provided only to loan officers through specialized credit reporting companies that access your credit information from all three major agencies ? Experian, Equifax and Trans Union ? and compile them into a single report.

A loan officer must obtain your report through a lender-approved residential mortgage credit reporting company. If you already receive your own credit report through another source, you will not be able to substitute it for the one the mortgage lender gets.

And while married couples each have their own separate files with the credit bureaus, the mortgage credit reporting agencies can compile a report that includes information on both spouses. But technically each person's credit report is separate, and each one will have a separate credit score from each agency.

Along with this tri-merge credit report, the lender will receive your credit score from each of the three credit reporting agencies. These scores will be FICOŽ credit scores. FICO credit scores range from a low of 300 points to as high as 850 points, though few consumers have a perfect score. The median FICO score nationwide is 723. That means half of consumers' scores are higher and half are lower.

Because the information maintained by each credit reporting agency is used to calculate your score, you will likely have three different credit scores. Most mortgage lenders will base your loan on the middle of those three scores. So if, for example, your three FICO scores are 620, 650 and 661, the middle score ? or 650 ? will be used to qualify you for a rate and program.

Lender Rate Match Tip: Your three-bureau FICO scores are not the same as other credit scores provided to consumers through various credit report subscription products. The only place you can obtain them directly as a consumer is at myFICO.com.

The FICO score will often determine which program you qualify for (interest-only, or no income documentation required, for example) and the interest rate for the loan. Here are tips for improving your credit score to get the best mortgage:

Start Early: Mistakes on credit reports can take weeks (if not months) to fix, even when the lender or credit reporting agencies acknowledge the error. That's why, at Lender Rate Match, we recommend you review your credit reports and FICO scores early in the process, to give yourself time to fix mistakes and make improvements.

Tip: If you don't have the luxury of time, see our article, How to Quickly Fix Your Credit to Get the Best Mortgage Loan

Get Good Advice: When it comes to advice for improving credit scores, there is no shortage of it. Watch out for "quick fixes" that may hurt your score, rather than help it. Even experienced loan officers may have ideas about credit scoring that are not entirely correct, or have not kept up with changes in credit scoring systems which are updated periodically.

For example, in one study by Experian Consumer Direct(SM), the national average credit score for consumers with debt above the national average was higher than the average credit score for those with debt below the national average.

It is very difficult to accurately predict the effect of a particular action on a credit score. Since scores take into account everything in your report, one action may have a positive effect on one person's score, a negative effect on another, and do nothing to still another person's!

A tool such as a credit score simulator can help you better understand how different actions may affect your credit score. Score simulators allow you to see the effect of particular actions, such as paying down a credit card balance, on your credit score. A score simulator may be available through your loan officer, through the credit reporting agency they use to access mortgage credit reports. Or if you are planning ahead - as we recommend at Lender Rate Match - you can use a score simulator provided by FICO in their FICO Deluxe Kit.

What May Not Help Your Score

Closing Old Accounts: Leave old accounts alone! A longer credit history can benefit you, and as far as the FICO score is concerned having a lot of available credit will not hurt your credit score. Still not convinced? Read our article, Why You Should Not Close Old Credit Cards Before Getting a Mortgage.

Paying Collection Accounts: Whether it is paid or not paid, a collection account is negative on your credit, and paying it can actually drop your score. Unless the lender requires you pay off a collection account to get your loan, or you may be sued, or you are not in immediate need of a loan, you may want to hold off paying the account until your loan closes.

Boosting Your Income: Your income does not affect your credit score. It may help you get the loan you need in other ways, but it won't boost your score. We don't recommend you lie about your income on a loan application.

What May Help Your Score

Paying Down Credit Card Balances: In one analysis by EverydayWealth of 39,000 consumer's credit reports over two years, high balances on revolving accounts (such as credit cards) was the number one reason consumer's scores were not higher. Ideally, try to keep your revolving balances lower than 30% of the available credit on a given account. (Revolving accounts are credit cards, and some lines of credit.) A few major credit card issuers do not report credit limits and when that happens, even a small balance can make you appear "maxxed out." Try to pay those accounts down, but don't close them.

Using Credit: Some consumers who have been through credit difficulties like bankruptcy shy away from using credit cards. But for the sake of your credit score, you need to continue to use credit. One or two major credit cards paid on time can be beneficial and many lenders want to see four accounts open, active and paid on time for at least 12 ? 24 months. If necessary, get a secured credit card by shopping at CardRatings. Note that for mortgage purposes, an account often must be open for at least twelve months to be counted as active, so this is not a quick fix.

Shopping Carefully For a Mortgage: Inquiries into your credit file can affect your credit score. There is a special buffer built into the FICO score to allow consumers to shop for best deals: All mortgage and auto-related inquiries within the most recent 30-day period are ignored, while mortgage-related inquiries or auto-related inquiries within a 14-day period (before the most recent 30-day period) are treated as a single inquiry. Still, some inquiries may get around this buffer and lower your score.

Lender Rate Match Tip: Checking your own credit report through myFICO does not affect your score.

In addition, when you apply for a mortgage through a lender and your credit report is accessed through a mortgage credit reporting agency, the credit reporting agencies then often sell that information to other mortgage applications, using what is known as "trigger lists." That's why applying for a mortgage may result in a flood of mail or phone calls from mortgage companies. To prevent this from happening, opt out of pre-approved offers by calling 1-888-5OPT-OUT. In addition you may want to register your phone number with the federal Do Not Call Registry.

Lender Rate Match Tip: You can search for rates using Lender Rate Match. When you find the mortgage loan you want, you can work with one loan officer to make it happen.

Final Warning

Do not make any major changes to your credit situation until your mortgage closes, such as opening a new account to buy furniture or appliances for the new house you are planning on buying. The lender may pull a new credit report prior to closing and the new account could sink your credit score!