- By Josh Turpin

It takes a lifetime to build perfect credit and only seconds for it to come crashing down.  When buying a home or refinancing, the credit factor is quite possibly the most important. It is something you need to understand to avoid paying too much for a home loan. 
 
Credit Basics – Knowing is Half the Battle
First, let’s talk credit basics.  It is important you understand how good credit scores are built before you try to comprehend how they can be devastated. 
 
There are three credit bureaus (technically they are called Credit Reporting Agencies or CRAs). The three CRAs are  Experian, Equifax, and TransUnion.  Each of them is responsible for collecting, analyzing, and disseminating this data to various credit providers like Factual Data.  Companies like Factual Data obtain data from all three bureaus and compile it into one report called a “tri-merge” credit report.  Various credit providers purchase these reports from the providers and use them to make decisions on whether to extend a consumer credit.

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Quite often I speak to customers and they may say something like, “I have a 700 credit score.”  Then, upon investigating further, I find that the score used for mortgage lending purposes is actually much lower.  Why?  Because they have three scores and people tend to cling onto their highest one.  In all reality, when making mortgage lending decisions, we use the middle score.  If there is a co-borrower, we use the lowest middle credit score of both borrowers.  In the above scenario, the person may have had a 700, 675, and 625 respectively.  In that case we would use the score of 675.
 
Why are the scores different?  - Because not all creditors report to every credit bureau.  Again, why?  Because it costs them money to report to each of them and some creditors choose to only report to one or two of them to save money. 
 
How are credit scores calculated? – The method behind the madness.
This is a tricky question as there are tiny adjustments that can be made to a person’s current credit situation to make significant changes.  However, according to this article from Wikipedia, there is some reason to a credit score’s rhyme and credit scores are derived from the following sources:

• "35%: payment history: This is best described as the presence or lack of derogatory information. Bankruptcy, liens, judgments, settlements, charge offs, repossessions, foreclosures, and late payments can cause a FICO score to drop.
• 30%: debt burden: This category considers a number of debt specific measurements, and not just the infamous credit card debt to limit ratio, as is commonly misreported. According to FICO there are some six different metrics in the debt category including the debt to limit ratio, number of accounts with balances, amount owed across different types of accounts, and the amount paid down on installment loans.[6]
• 15%: length of credit history aka Time in File: As a credit history ages it can have a positive impact on its FICO score. There are two metrics in this category: the average age of the accounts on your report and the age of the oldest account.
• 10%: types of credit used (installment, revolving, consumer finance, mortgage): Consumers can benefit by having a history of managing different types of credit.[7]
• 10%: recent searches for credit: hard credit inquiries, which occur when consumers apply for a credit card or loan (revolving or otherwise), can hurt scores, especially if done in great numbers. Individuals who are "rate shopping" for a mortgage, auto loan, or student loan over a short period (two weeks or 45 days, depending on the generation of FICO score used) will likely not experience a meaningful decrease in their scores as a result of these types of inquiries, as the FICO scoring model considers all of those types of hard inquiries that occur within 14 or 45 days of each other as only one. Further, mortgage, auto, and student loan inquiries do not count at all in your FICO score if they are less than 30 days old. While all credit inquiries are recorded and displayed on personal credit reports for two years they have no effect after the first year because FICO's scoring system ignores them after 12 months.[citation needed] Credit inquiries that were made by the consumer (such as pulling a credit report for personal use), by an employer (for employee verification), or by companies initiating pre-screened offers of credit or insurance do not have any impact on a credit score: these are called "soft inquiries" or "soft pulls", and do not appear on a credit report used by lenders, only on personal reports. Soft inquiries are not considered by credit scoring systems."

 
Time Heals All Things
So, you can see that since a whopping 35% of a person’s credit score is attributed to payment history, sometimes the only thing that can effectively heal a person’s credit is time.  Additionally 15% of your score can be attributed to length of credit history.  Therefore, a person who has had a solid track record of credit use for 35 years will feel less effect on their credit for one mistaken late payment than someone who has only had credit for a couple years.
Time may heal most things but it is often an unfortunate thing when it comes to buying a home.  That is why it is important to talk to a mortgage lender way in advance of buying a home.  This way, you can address any issues that may come up before finding your dream home and use time to your advantage.  
 
But What If You Don’t Have a Lot of Time
It is always best to progress slowly and with caution when it comes to home finance.  Whether purchasing or refinancing, planning ahead is wise.  However, there are circumstances when it becomes necessary to act quickly – otherwise opportunities can be missed.  So, if you find yourself in a situation where you need to try to quickly raise your credit scores to qualify for a home loan (or a better one for that matter), there are some things you can do to make it happen faster.  Below are a few of those things.

1. Pay Down Revolving Debt – The proportionate amount of outstanding credit compared to the available credit limit is a huge factor in credit scores. Paige White with Credit Law Center out of Lee’s Summit, Missouri provided us some insight.  “Keep all credit card balances below 30% at all times,” she says.  Anything over 30% will greatly hinder your credit score.

This may seem obvious but paying down your revolving debt as much as you can will have a huge effect on your credit.  The more you pay it down the more effect it will have.  So, pay it off if you can.  Beware, one common mistake is to pay off a credit card and subsequently cancel the account.  You want to have some open accounts on your credit and cancelling all of them can have an adverse effect on your credit.  If you are dead set on cancelling accounts cancel the newer accounts and let the ones you have had the longest remain open…they show established credit.

1. Raise Your Credit Card Balances – Let’s say you have an outstanding balance of $1,000 on a credit card that has a $1,000 limit.  By increasing the limit to $2,000 you will have a lower balance compared to the credit limit which will help your credit scores.  Again, the lower the proportionate amount, the more effect it will have on your credit.

1. Don’t Pay Off Collections – It may surprise some people that paying off collections can actually decrease your credit scores.  According to Paige at Credit Law Centers, “Paying off collections after they are reported to your credit report will NOT increase your scores but may actually decrease your scores as it will “re-age” the account.”  This means that it brings the account up to date as a current collection and could really hinder your scores.  If you have collections and are applying for a mortgage loan, wait for your loan officer to tell you to pay off the accounts.  Usually this can be a loan condition that can be done after approval.  Once approved you already have the credit scores needed for approval.  So, if they are paid off later and your scores drop a little, it shouldn’t hinder your loan approval status.

1. Get More Credit For A Healthy Credit Profile – Getting more credit to help your credit doesn’t sound very reasonable.  But, having 3-5 revolving lines of credit and 1-3 installment lines are the sweet spots in the credit world.  When applying to a home loan, having no credit can be as devastating as having bad credit.  If addressed ahead of time instead of the last minute, a borrower can go open a couple credit lines, use it responsibly, and increase their credit rating rather quickly.  Typically we recommend contacting Capital One to get a small balance card or to open a retail card like Khols.  These are easy types of credit to obtain. The key is to make sure all of these types of credit are used responsibly and all payments are made on time.  We usually suggest charging $50-100 per month, let it report on the card at least one month, and then pay it off.  Doing this can help increase your scores rather quickly.

1. Never Be Late! – Obviously. -  This may seem pretty obvious.  But, what may not be so obvious is that one late payment can decrease someone’s score very quickly.  Paige White at Credit Law Center states, “One late payment can decrease someone's scores by 100 points overnight - Never be late!” 

 
Call In the Professionals
We have mentioned Credit Law Center out of Lee’s Summit, Missouri several times in this article and there is good reason for that.  There are TONS of unscrupulous “credit repair” schemes out there.    I’ve seen it all.  A great many of them do nothing but take your money.  Some of them have upfront fees.  Some of them have monthly fees.  Most of them will make money on the consumer regardless of whether they even help them increase their credit scores.  At Credit Law Center, you work with real attorneys - people who can get stuff done.  With Paige and the crew, you don’t pay until it goes away.  Quite simply, they are the best I’ve have ever seen.  Below is their contact information.
 
Credit Law Center
Paige White
255 NW Blue Barkway Ste. 200
Lee’s Summit, MO 64063
Ph. 816-272-8859
www.creditlawcenter.com
 
Don’t Procrastinate
DO NOT wait until the last minute to know your credit status.  It is silly, and quite frankly irresponsible, to wait until you need credit to know your ability to obtain it.  Knowing in advance will help you prepare so you can work towards improving your credit rating.  Having the best credit rating possible will ensure you that you will get the best possible rates on things like home loan, auto loans, and even insurance.  Not knowing is likely to cost you a substantial amount of money over the long haul.

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By Josh Turpin

A decade ago 100% financing options were the norm for buying a home.  The thought was, why put any money down if you don’t have to?  Although there are pros and cons to putting money down, when it comes to buying a home nowadays, there are very few 100% financing options available. Typically there is a minimum down payment of 3.5% (for FHA loans).  This money has to be sourced and seasoned and cannot be borrowed.  That being said, there are some crafty ways to raise your down payment with little-to-no money out of your own pocket. 
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Using Gift Funds For a Down Payment
Not everyone has a rich uncle willing to buy them a home.  Likewise, most home buyers will need to use some sort of financing to buy their home. In this case, there are certain rules that apply to the funds involved in the transaction.  Making sure the funds are not borrowed in any way is one of those rules.  The money has to be gifted. 

Rich uncle aside, you might be surprised who may step up to the plate when it comes to helping you get into a home.  Quite often I have seen borrowers obtain money from a family member in order to pay for a minimal down payment.  Funds obtained by another entity to buy a home typically fall under the category of “gift funds”.  Most home loan programs allow gift funds as long as they are from one of the following types of entities:

• The borrower's relative
• The borrower's employer or labor union
• A close friend with a clearly defined and documented interest in the borrower
• A charitable organization
• A governmental agency or public entity that has a program providing home ownership assistance to low- and moderate-income families, or first-time home buyers.

 
One imperative requirement of gift funds is that they CANNOT BE A LOAN.  This means there can be no expectation of repayment.  This also means there will have to be a signed Gift Funds Letter that is a written agreement between the giver and receiver that states the funds are a gift, not a loan, and there is no expectation of repayment. It will need to be signed by both the giver and the borrowers.

Another requirement of the gift funds are that they need to be sourced and seasoned (just like any other money used when obtaining a mortgage).  This means the giver will be required to show where the money came from.  This money will also have to be tracked as it moves from their account to the closing transaction.  So, if they gift the money directly to the receiver, the parties will need to show the money coming out of the giver’s account and going into the receiver’s account.  This is why it is very important NOT TO PROVIDE GIFT FUNDS IN THE FORM OF CASH.  Therefore, if the giver is sitting on a ton of “mattress money,” they will need to deposit the money into their bank account, let it sit there for at least 30 days, and then gift it to the home buyer. 

One way to avoid having to go through the pain of showing all of these transactions is for the giver to pay the funds at closing directly to the title company. They will still have to source it by showing an account statement but there is less paperwork to provide.

Remember, when buying a home, you have to consider not only down payment but also closing costs and pre-paid items.  Such closing costs will include lender fees, title charges, the cost of an appraisal, and other various fees.  Prepaid items include setting up an escrow account to pay taxes and insurance when they come due.  These items add up quickly.  For a low down payment program, these costs can even exceed the amount of the down payment.  See my article, “How to Avoid Paying Closing Costs When Buying a House,” for more information on how to avoid such out of pocket costs.

Regardless of whether you pay the down payment or closing costs out of pocket or raise it via another means, it is important that the financing you do obtain is competitive.  That is where I step in.  Contact Me to obtain a free, no obligation, quote on for your next home purchase loan!

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