A Credit Score Below 640 Can Cost You Thousands But You Can Still Get An FHA Loan!
Mortgage terms are far better for borrowers with a 640 or higher credit score but you can still get an FHA loan with a lower score. Just know that your out of pocket costs as well as your monthly payment will be more expensive.
While it is true that FHA has no minimum credit score requirement to insure a home loan. It’s also true that most of the lenders that provide the money to actually fund these FHA loans do have a minimum score. In most cases a minimum 580 score is required.
Should You Try To Raise Your Score or Simply Pay More?
At Michigan Mortgage Solutions, we’ve helped borrowers get approved for FHA loans with scores lower than 580. However, in most circumstances, it’s actually easier, and less expensive, for the borrower to improve their score above 600.
Most borrowers don’t realize how fast, affordable and easy it can be to go from a low credit score in the mid 500’s to a score above 600. I’m surprised by how we are able to show some of the borrowers we’ve helped how to raise their credit scores by 60 points in under three weeks! It’s not like that for everyone but it’s totally possible.
Soft Credit Pull – Get Your Experian Mortgage Credit Score With No Hard Inquiry
The first step is to figure out what your current mortgage credit profile and score look like. From there we can help put together a solid plan of action to improve your score. Michigan Mortgage Solutions provides an awesome harm free way to get this data without needing your Social Security Number or putting a hard inquiry on your Current Credit Report.
A soft credit pull from Experian is risk free and safe way to figure out what steps you need to take to get mortgage ready. We look at dozens of credit reports each week and have the knowledge and track record to help you improve your score quickly.
To learn more about the Completing a Mortgage Soft Pull click here.
Dealing With The Past May Have a Cost But The Investment is Usually Worth It
Quickly improving your credit score may require you to take financial responsibility for bad credit events that happened in the past. Beyond the big ones like Bankruptcy or Foreclosure, other credit events like credit card collections/charge offs, non-medical collections/repossessions over $2000 and early termination fees or collections for past living expenses. These debts may need to be settled to quickly improve your score for a mortgage.
I know it’s hard to separate yourself from hard earned money to pay a bill of which you’ve probably already justified you don’t need to pay back. But I can guarantee you the investment will pay off plus you can most likely settle it for less than the outstanding balance.
Collection Accounts And How To Handle Them
Collection accounts only affect your credit score by reporting the collection to the credit bureaus each month. The bureaus treat every reporting of a collection as a new negative event on your report. It has the same affect on the score each month and will do so until it stops reporting.
To stop the reporting, the debt will need to be paid or settled or the statute of limitations has passed. The collection will no longer report the new negative event if either of the above happen. Each month going forward, the credit score will increase in small increments.
However, if you have a collection account that has not reported in several years or even one year, it may be best to leave it alone. You don’t want to do anything that would encourage that collection to report again so it may be best to just leave it alone.
Never Pay In Full For Collection Accounts Unless They Will Delete
The data behind the collection does not matter because it has no affect on your score. How much you owe, who you owe it to or if you settle it for less than the full balance, will have no affect on the score. However, if you settle the debt it will no longer update the reporting after reporting it has been paid.
The only time I would ever encourage someone to pay a collection account in full would be if the collection agency agreed to delete all reporting from each credit bureau. This can have a fast and big impact on a credit score.
Make sure to have the collection agency email you confirmation that they will delete all credit data to all three bureaus prior to sending them any money. Same goes for any settlement offered, get it in writing and always ask for the delete. YOU DON’T GET IF YOU DON’T ASK!!!
Credit Card Collections Are Double Killing Your Credit Score
Credit card collections/charge offs are the worst for your score because they destroy your balance to limit ratio and report each month as a negative credit event. This is a double whammy to your credit score.
Once a card goes to collections they add fees to the outstanding balance and then reduce the credit limit to $0. If this was your only credit card you would have a negative balance to limit ratio.
The balance to limit ratio on revolving accounts, like credit cards, can be responsible for up to 30% of your credit score. If you don’t have a credit card, or worse you have a charged off card, your score will suffer significantly.
Paying Off Your Credit Card Collections is a Top Priority!
Because of their compound negative affect on your score, credit card collections should be dealt with as soon as possible. It’s imperative to settle these accounts quickly if you want to see fast improvements in your score. Remember to offer much lower than the balance and always ask for the Delete.
One of the best tactics I can suggest for settling is to determine the number you are willing to pay and offer $50 less than that for settlement. When determining your number, anything less than 35% will likely get rejected.
It also helps to have an alibi for the money used to pay it off. What I mean is that you should have a reason for the dollar amount you came up with. Good reasons are as follows;
- I’m getting a bonus at work for ($YourDollarAmount) and I’d like to take care of one of my collection accounts. I have three collections that I owe about the same amount of money to and I’m going to work with the one that works with me.
- I’m getting a tax refund for ($YourDollarAmount) and I’d like to take care of one of my collection accounts. I have three collections that I owe about the same amount of money to and I’m going to work with the one that works with me.
- I inherited ($YourDollarAmount) and I’d like to take care of one of my collection accounts. I have three collections that I owe about the same amount of money to and I’m going to work with the one that works with me.
If You Don’t Have a Credit Card You Aren’t Serious About Your Credit Score
As I mentioned previously, the balance to limit ratio on credit cards can be responsible for up to 30% of your credit score. If you don’t have a card, you simply cannot maximize your credit score. A lot of borrowers associate having a credit card with having debt which couldn’t be farther from the truth.
If you are smart with credit cards they can build your credit score quickly and also provide you with additional benefits. I have a card that pays me over $1,000 per year to use it as well as a card that provides me with free travel miles for airfare. I pay these cards off each month to avoid paying interest so I use them as a tool to build wealth not debt.
How To Get a Credit Card If You Don’t Have One
If you have a credit score under 620 you will likely need to get a secured credit card as you won’t qualify for a traditional card. A secured card requires a deposit to fund the cards credit limit. Deposits can range from $200 to $2000.
There are several secured cards to choose from but we prefer The Credit Builder Card. We like this card because it has a low deposit of $200, there is no hard inquiry on your credit report, the card reports multiple times per month and the approval process is fast and easy.
To learn more about the Credit Builder Card and Completing a Mortgage Soft Pull click here.
How To Use a Credit Card To Maximize Credit Score While Avoiding Debt
Beyond paying the bill on time, the most important aspect of using a credit card is to maintain a credit balance above $0 but below 9% of the credit limit. If you have a $200 credit limit you should never owe more than $18 when the card reports.
The easiest way to accomplish this is to only use this card one time per month for $18 and then put it away. When the bill comes for the $18, simply pay it and then go charge $18 again. Do this process every month like clockwork and your score will max out.
What if I have a Credit Card With a High Balance
While 9% is the ideal ratio for maximizing your score, you can still see improvement by paying the balance down in ten percent increments. Try to find the next ten percent tier below your current balance and attempt to pay the balance down below that.
For example, if you have a five hundred dollar credit limit and you owe three hundred dollars, you will have a sixty percent balance to limit ratio. If you are able to pay that balance down by fifty dollars to two-fifty, you will improve your balance to limit ratio to fifty percent. This will have a positive impact and raise your credit score.
We’ve found that for every ten percent reduction in balance ratio, you can expect a five to ten point increase in score. Depending on your balance, a little bit of budgeting could have your score up in no time.
To learn more about the Credit Builder Card and Completing a Mortgage Soft Pull click here.