Figures provided by FICO Inc. show that as of April, 25% of consumers (about 43 million people) now have a credit score of 599 or below, making them a big risk for lenders. This number is up from the historical norm of 15%. At the other end, interestingly, the number of consumers who have a top score of 800 or above has increased in recent years – mostly attributed to them cutting spending and paying down debt. So what can you do to improve your credit scores and keep them higher? as this will ultimately get you a lower interest rate and save more money on a purchase or refinance loan.
Falling Credit in the US
Here is a chart below that shows how credit in the US was before the recession and after the recession.
More and more people are having their credit profiles affected by the ongoing financial crisis in this country. With loans getting tougher to qualify for and underwriting guidelines requiring higher credit scores, understanding how credit scoring works is going to be something that many people are going to have to learn to understand so they can repair their credit.
Just how much does lower scores cost on a loan?
Below is a table of Fannie Mae’s Risk Based Loan Level Price Adjustments (LLPA’s). These LLPA’s take into consideration a buyers credit score and down payment on a loan scenario. These LLPA’s are subtracted from a borrower’s loan pricing, which pushes their mortgage rate higher. For example, a borrower with a FICO score between 680-699 takes a 1.50 point hit on their pricing at an 80% loan to value. If this fee was paid at closing, on a $300,000 loan, it would cost an additional $4500 to close! As this is usually just too much for a borrower to pay, they will then have to take a higher interest rate.
I don’t blame the GSE’s (Fannie Mae & Freddie Mac) for adjusting their risk model, but these loan level pricing adjustor’s will prevent many folks from qualifying for a refinance…either that or they will look to the FHA, which has less restrictive underwriting regs after a “pre-foreclosure event” (3 years!) and far fewer LLPAs for financing. But then of course the FHA has a 2.25% funding fee that must be paid on all loans so either way you slice it these days, loans are getting a lot more expensive for most people.
What does this mean for the future of housing demand?
Fixing a consumer’s credit is not an easy process, nor is it quick. Depending on the make-up of defaults, it can take years to rebuild a credit profile, especially when banks are reluctant to lend. We are heading in opposite directions here! Underwriting guidelines are as tight as they’ve ever been (I feel for the self-employed) and over 26 million Americans are unemployed or underemployed. Many of the jobs that were lost over the course of the last two years will be lost forever to gains in labor productivity and investments in technology.
Plain and Simple: We all need to be looking at the macroeconomic recovery from a long-term perspective. We must focus on educating our children. We must start building their credit profiles now so they fit into underwriting guidelines when they’re ready to buy a home. We must prepare the next generation to carry the torch of the economic recovery.
5 ways to increase your credit score-and fast
Here are 5 great strategies that you can utilize right away to give your score a little boost.
1. Get Your Report
The three main credit bureaus, Equifax, Experian®, and TransUnion®, are required by law to provide you with a free copy of your credit report once every 12 months. To request your free copy (one from each company) visit AnnualCreditReport.com
or call 1-877-322-8228. (Note: free credit reports do not include credit scores. Scores can either be purchased on-line or pulled by your mortgage professional.) While you’re on-line, be sure to visit www.optoutprescreen.com
as well. This will help you “opt out” of all the junk mail you get in the mail, credit experts advise this will give your score a boost immediately.
2. Create Some Balance: The trick is to get and keep your balances below 30% of your credit limit on each card. Remember, if you pay off any credit cards completely, do not close your accounts without discussing it with your mortgage professional first. Canceling those cards may inadvertently undo all of your hard work.
3. Know your limits: Make sure that your credit card issuers are reporting the correct limits on your accounts to the three major credit bureaus. Without an available limit, your account will appear to be maxed out at its highest reported balance each month. This could cost you up to 80 points in certain instances. Also, if you’re in very good standing, ask your creditor for a lower rate or higher credit limit. This will increase the gap in the debt you owe versus the credit you have available. Sometimes hinting about closing an account can suddenly bring out the generous spirit of certain card issuers. Give it a try. The worst they can say is no.
4. Protect Your Interests: Your credit is calculated based solely on the information available to your creditors. If you have a HELOC, make sure it’s listed as a mortgage or an installment account on your credit reports and not a revolving debt. If you had a bankruptcy, be sure that all items associated with the bankruptcy are being reported correctly, that is with a zero balance. This action could increase your score by 50-100 points. Because simple mistakes like these can wreak havoc on your credit score, it’s important to monitor your credit every four to six months.
5. Even the Score: If you find information on your credit report that you believe is inaccurate or incomplete, then you have the right to dispute it free of charge. For the fastest results, visit the appropriate credit bureau’s website and file a complaint on-line. If supporting documents are necessary, you have to file your dispute by mail.
Educating people about credit scoring
As we seen above, a simple increase in credit scores from 700 to 740 can save someone $4,500k on a $300k purchase loan and get them a lower rate. I think it is imperative that people beging to learn about credit scoring, so they have every possibility to score the lowest interest rate on their loan. I have learned to become pretty educated on credit scoring myself and have worked with many buyers who were unable to qualify for a loan because their scores were too low.
One of the tools we can use is the ”credit analyzer” system which our credit company offers for our clients, this predicitive credit scoring system will allow you to see how high credit scores can go if certain actions are taken in regards to credit, this way a potential buyer has a definite plan of action to improve their credit scores to meet the qualifications needed for a loan. The credit analyzer truly is a fantastic tool as it accurately predicts future credit scores using the same algorithms used in credit scoring.
If you know of anyone that needs a little help improving their credit scores so they can qualify for a loan or they need help getting pointed in the right direction to repair their credit, feel free to contact me with any questions you have. I look forward to chatting soon.