Your FICO score is the most important determining factor in saving money when you buy a home. The FICO score you have will determine the loan-to-value ratio or percentage of the purchase price you may borrow.
The interest rate you pay on the life of the loan is dictated by your score; in other words, the impact can translate to hundreds of dollars a month more that you will pay on your mortgage. The FICO score is an automated system designed to evaluate your payment history, derogatory marks (late payments, delinquencies, etc.), active accounts, types of credit used, and the percentage of used credit compared to available credit. A computer software program will bring all this information down to a number to assist an underwriter in evaluating your credit report. With this universal system in place for underwriting credit reports, subjectivity in the process of determining a borrower's eligibility for credit is limited.
With the significant changes that have occurred in the sub-prime and even prime lending market, the demand for borrowers with high FICO scores has become greater today than ever before. For a full documentation loan, in which case pay-stubs and W-2s are provided, the requirements have gone from a 600 FICO score to a score of 660. For stated income loans where no income documentation is required, the required FICO score has gone from 620 all the way up to 700. These numbers all pertain to 100% financing and coming in with a down payment will allow for slightly lower FICO scores.
The first thing you want to look at is the accuracy of the report. Are all the accounts properly reflected? If not, you'll want to contact each of the major credit reporting agencies to correct any mistakes. Paying down the balances on credit cards will produce the greatest improvement in your credit profile because the system calculates the ratio of used credit to available credit on the credit cards. However, this does not apply to installment debt, like student and car loans. If you cannot raise enough extra money to pay down your debt, the next best course of action is to increase the credit limits on your cards. Again the system will calculate the ratio between available credit and used credit, therefore reflecting an improvement in your credit score.
Another technique that can work well is opening another card and transferring the balances. This can free up additional credit and improve your FICO score. When you have a husband and wife with substantially different credit scores an opportunity exists. By adding the spouse with the lower scores on to the credit cards of the spouse with the higher scores, an increase in the lower FICO scores should occur.
It may seem like these changes will take a long time to occur; fortunately, however, when working with a mortgage broker, once the changes are in place the credit report can be rescored. This process is called a rapid re-score and with letters from the credit card companies the changes can occur in one week. Another tool available to mortgage brokers is called a what-if simulator. This allows potential modification scenarios to be played on your credit report, to see what the end result will be before you spend the money and time to make those changes.
In conclusion, as you can see, much can be done to make improvements on your credit score and an experienced mortgage broker can be an extremely valuable asset to have while you are attempting to maximize or repair your credit report.
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