Jim’s Mortgage Corner | Real estate




In previous articles, I have emphasized that your FICO score is the number one reason for your ability to qualify for a mortgage. Job stability, income, existing debt, etc. all affect your ability to qualify for a mortgage, but your FICO rating has the greatest impact on your purchasing power.

Many lenders adopted a methodology many years ago called risk-based pricing, which allows lenders to measure credit risk. Risk-based pricing takes into account many factors, including credit rating, credit history, employment status and income, to determine interest rates and your creditworthiness.

The easiest way to explain this is with an example. Please note that this is just an example and I am not listing actual rates. Let’s take a purchase price of $ 300,000 and you apply a 3.5% down payment on an FHA loan. With mortgage insurance, your loan amount will be $ 294,566. Based on your debt ratios (existing debt plus your new mortgage payment divided by your gross income), what if the maximum loan payment you can qualify for is $ 1203 (using only principal and interest).

 If your FICO score is 700, your interest rate may be 2.75%, so your principal and interest will be $ 1203 on a 30-year loan, so you qualify for the $ 300,000 purchase price.

 If your FICO score is 630, your interest rate could be 4.25%, so the principal and interest on a 30-year loan would be $ 1,449. Based on this amount, the maximum purchase price you can qualify for is $ 250,000!

Based on two examples, only your FICO score has changed. The 70 point difference on your FICO score can make a difference when choosing a $ 300,000 or $ 250,000 home.

What’s the best way to increase your FICO score? Unless you have late payments, fees, court decisions, etc., the most common factors that will prevent you from getting a higher score are: 1) no payment history, 2) the length of the payment history in your accounts, and / or 3) balances on your revolving debt (credit cards).

If you only have one or two credit cards, I would advise you to open another credit card, withdraw a small amount, and repay it when you receive your first bill. If you already have three credit cards, the amount owed in your revolving accounts can be up to 30% of your credit rating. A general rule of thumb is to keep your credit card balance at 30% or less than the credit limit.

For every credit card with a balance in excess of 80% of the credit limit that pays up to 30% of the credit limit, you can expect a 20-point increase for each card. For example, if you have four credit cards with large balances and you pay up to 30% or less on each of them than your credit limit, you could potentially see a 60-80 point increase in your FICO rating.

Payment history and the length of the payment history is up to 50% of your credit rating. Here’s a little secret that most people don’t know about to improve their performance. If you have a credit card that you haven’t used in years and is still open, I recommend that you withdraw a small amount from it. In most cases, this will improve your FICO score. Wait, did I just say that charging a credit card can improve your bottom line? Let me clarify. Let’s say you have a credit card for eight years, but the last time you used it was three years ago. At the moment, you have a five-year history of payments for this card. By withdrawing a small amount and paying it, you will move your payment history forward and overnight, because you added three additional years of payment history.

Most importantly, do not close existing accounts so that your payment history continues to positively affect your FICO rating.

Branch Director, NMLS No. 1721861

Cherry Creek Mortgage, LLC, NMLS 3001


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