Credit Score Improvement Strategy - Need 2nd Opinion
Hello all,
I'm applying for my first home loan and received some advice from the loan officer and I wanted some other opinions. My home is currently being built (new construction home in Arizona) so I have some time before we really need to get moving on the mortgage. The officer said that to bring my credit score up between now and close of escrow, he recommended that I have my parents add me to one of their credit cards that they either rarely use or pay down every month. After we finalize the paperwork, they can take me off but he said this will help my score between now and then as it shows a long credit history in good standing since they've had this card for a while.
My parents have a card that they almost never use with a $50,000 credit limit. They've had this card for almost 12 years and never been late with a payment when it was used.
I have $50,000 cash for a down payment on the home (a little over 20%).
My question is: does this strategy work? Is the underwriter going to look at this like I could go get myself into $50,000 worth of debt tomorrow if I got a sudden urge to spend? I voiced these concerns to the officer and he said it wouldn't matter much since I have roughly that amount in the bank for a down payment.
Just looking for some second opinions on this strategy.
Thanks,
Scott
I'm not very experienced in this, but we went through a total nightmare with buying our house 2 years ago and learned alot from our mistakes.
First of all, I would think that putting $50,000 down on a house would reflect VERY nicely on your credit worthiness, unless you have lots of judgments, repose, etc. You would be less likely to run out on the place since you would have so much of your own money invested upfront.
About the credit card-- I would think it would show up on your credit report as being recently added, and not having the card for 12 years.
Anyway, I'm like you and don't understand what good adding yourself to a credit card would do. That's just my opinion. We bought our house with hardly any money down, basically on my credit. (My husband's credit had a lot of bad debt, but some good debt, and he still had a decent credit score!) So, I guess it depends on your age and other factors. Good luck, and maybe someone else more experience can give better input?
Finding a credit expert seems to be like finding the lockness monster. Be very cautious about getting advice on this subject. I have a 753 FICO and am 30 years old, and that is about all of the qualifications I have to offer. I can tell you that I have made many right moves concerning credit, and would be happy to elaborate.
First, help me help you...
What is your current score+-?
do you have credit cards of your own?
any blemishes?
how much debt do you have?
BTW, I am very skeptical of your lenders idea. I am not even sure if it would show up on your report.
[addsig]
Thanks for the reply! I thought it the card would show as recently added as well, but the information I got from the loan officer seemed to contradict that. Since I'm relatively inexperienced here I decided to fish for more information in these forums.
I have a decent credit score (650) but it could stand some improvement. I had a lot of credit trouble when I was younger and didn't understand the importance of a good credit score but all of those bad debts have been paid off and the credit reports all show this now. No repos, bankruptcies or anything like that. Just some late payments and outstanding debts that have since been paid.
Anyways, I appreciate your response, maybe we can learn more from some other people who have more experience than us here!
What is the total purchase price? Do you need to put down $50,000 to qualify, or does it get you into a LTV ratio for a better rate, etc...? I only ask because you may want to weigh the advantages of a minimal downpayment and actually USING part of that $50,000 to build your RE investments. Once it's tied up in the house, the only way to get it out is to sell the house, or borrow against it. Don't own it...control it...[ Edited by norrist on Date 12/30/2003 ]
nlsecor,
I just replied to the other poster as well, but thought I might answer some of your questions as well.
Credit Score: 650
Cards of my own: 1 (paid off and not being used - $600.00 limit)
Blemishes: Some past late payments and unpaid debts that have now been paid and are reflected correctly on my report.
Debt: Almost none (small student loan payment each month)
norrist,
It gets me a better rate and I avoid paying mortgage insurance. I have a large enough annual income that I'll be able to get more money for RE investments pretty quickly. I'm just concentrating on getting myself into a home first (renting right now).
Scott
The PMI does stink, I just like to have the cash with which to work. Just wanted to throw the thought at you!
YOu wouldn't have PMI if the loan officer broke-up your loan into 2 parts. 80% first 10% second or 80% first 15% second, etc. Adding you to the credit card will work because the report shows the length of time the account has been established and not how long it has been on your credit report.
I agree w Jfoley. I reccomend you improve your creit score and take a 80% first at 5 year fixed, and a 10% HELOC home equity line of credit. THe second should be a variable at 5.5% or less interest only. Borrow all day at that rate. Next, a 650 is very respectable, but just needs a push to get you over the top.
1. Immediately dispute any negatives on your report. That means late pays as well. If you are current, some co's may not care, and may not respond within 30 day max. Also, some file the info away after time, and may not have the resources to dispute your dispute. If you still do business with the late pays, ask them to remove it. when, yes I said when, they say no, explain that you are still doing business with them and ask if they think it is fair that you shoul not be able to buy a home because of late pays a long time ago. They of all people know that you are credit worthy, as they still do business with you.
Next...I reccomend you use your credit card and pay it off each month, or leave a small balance just to let the cc co. collect a little interest. I would also suggest you expand the limits, by aksing them to increase your limits. HOWEVER, you may be too close to your purchase to do this, and it may be better to wait until after.
next...you should improve your score by making sure your student loan is at least half paid off. original loan 5k...owe 2.5k
Don't be afraid to tap into that 50k to improve your credit.
Lastly, you must to continue to dispute your late pays. if at first you fail, try try again. The credit game is persistence. I believe there is no limit to the amount of times you can dispute a negative. start disputing NOW.
_________________
My advice is worth every penny you paid for it![ Edited by nlsecor on Date 12/31/2003 ]
nlsecor,
Sorry if there was any confusion but all of the negatives HAVE been paid and/or disputed. Everything that is on the report now is reflected correctly. It took me almost a year to get all three reporting agencies to show correct records. What a pain in the rear that was.
Student loan is almost paid off ($200 balance -- negligible and will be paid by the time escrow closes).
I appreciate ALL of your replies. This is a GREAT forum, I can't believe the amount of help everyone is willing to contribute so quickly!!
Scott
Hi Scott,
I'm probably just as new at this as you are but here's my penny's worth of wisdom. It has been my personal experience that as your loan officer stated to have open trade lines and pay them down monthly and not carry high balances is the best way to improve your score. However adding you to your parent's card is probably not going to increase your score significantly enough to risk lowering your score by adding debt to your report while you are seeking mortgage financing. This is always a bad idea, until your loan has closed. ( in my most humble opinion
Also, like the idea mentioned in the earlier post - " a bird in hand is worth more than.... so, my grandmother said. Other financing strategies with less cash requirements can be used to avoid PMI, and it is just my thinking, but you might be better protected to have the cash reserve available to you, if required. Also, this will only streghnthen your capacity in future investing, to have a cash down-payment from your future income, cash asset/additional reserves earning interest in an account (annuity, etc.) which can be readily liquidated . Traditional lenders will look more favorably on your investment loans thereby decreasing your interest rate and increasing your lending choices for future investment. property. The rate affects payment more than the principle. -- I think. You can always increase your monthly payment to your mortgage at your discretion, excelerating your payoff, but you will have the control and it sounds like you have good money mangement and discipline so you can trust yourself to act responsibly.
Happy New Year, and congrats on the new place!
I haven't read all the postings but I'll have to disagree with all I've read and agree with the loan officer.
If you parents just add you to their account your credit score would probably increase for the following reasons:
i) your debt/credit ratio would decrease significantly.
2) the average life of your account history would be longer.
I was added to my wife's account in the past and it didn't show on my credit report as seeking credit. They did not look at my credit history at all.
All I said is based on personal experience but I would contact an specialist for advice.
Andre
my only point is that a collection or a 30 60 90 that has been brought current still is a derrogatory. You want to dispute the fact that you paid late. If your credit shows no late pays then great. I am guessing that you still may see 30/60/90 late pay on your report. If so, I would dispute it. Once you have your house I would start expanding the available credit. One card is not enough. Remember debt/credit is a calculation. if you owe 3k on a 3k credit card, you are maxed. If you owe 8k on a 30k credit card, you are a "responsible user".
Any ways, good luck, use your card, and follow your broker if you think it will help.
Happy New Year!!!
[addsig]
Get Authorized User status on the parent's card. It does help. And it typically doesn't show up without the history, or as recently added. And it does bump scores up by increasing average age of accounts. Did it for my DW.
Make regular use of the credit card you have in your own name, but have it paid off 95% 30 days before they pull credit the next time. (100% payoff can sometimes hurt).
Write a Debt Validation letter, certified mail return receipt requested to any old collection agencies whose tradelines are still showing on your report. When you get the green card back, wait 30 days from that date, and dispute the tradeline on each of your credit bureau reports as "not mine."
For your old installment accounts and cards that have lates on them, it's trickier. Sometimes it can cost more points to lose the tradeline entirely to the dispute than you would gain if you got the lates removed ... and the former is a possibility if you so much as write a goodwill letter to the creditor to ask that they remove the lates. Old tradelines often add more points because of age than they take away because of the lates.
If any of the old original creditor tradelines are R9 chargeoffs, however, you may want to send "nutcase" letters to the original creditors threatening to sue over some unspecified inaccuracy, then dispute the tradelines off your reports as "not mine" about a month later ... at least you want to try that if you're outside the statute of limitations for the debts or if you paid a collection agency. If it's unpaid, you might want to avoid waking a sleeping giant. [ Edited by flacorps on Date 12/31/2003 ]
Get educated at
www.creditboards.com (especially their mortgage forum)
www.crediinfocenter.com (especially their discussion groups)
www.creditnet.com
You should be able to get over 720 in no time!
Everyone has offered so much insight on this! I am a Mortgage Broker and specialize in repairing my clients credit... Here's my 2 cents on this:
1. 650 is a great score! Maybe I am jaded cause most of my clients are below 600...
2. With 650 I can't imagine why the LO feels that you must raise it for the loan. It is of course in your best interest to raise anyway.
3. I think your parents $50K credit card is a bad idea. First, you would be an authorized user and that wouldn't raise your score. Second, if you do not already have credit cards, this is way too much "available" credit to abruptly add. Finally, my lenders look at the "seasoning" of credit accounts - this would just show up out of the blue and your parents payment history would not be reflected on your credit report. I think adding this might scare a lender and ultimately require some type of detailed explanantion...
4. It may slightly raise your score to get a credit card or two with smaller limits - but I've noticed that your score will only go so high with that type of debt...
Your score will skyrocket when you have a Mortgage and pay it on time every month. Everyone with a score over 700 (that I've seen) has or had a mortgage. That's the most critical score influence. Lenders like to see a healthy mix of moderate debts, a solid history (like no chronic credit card balance transfer jumping) and of course, always timely payments.
I also agree that once you tie up your money in real estate it becomes a hassle to get any capital back out.
PMI is the WORST money suck on the planet. It's a rip off and it isn't tax deductable like mortgage interest. Here are 3 options for you:
As somone already mentioned... 80% 1st mortgage with a piggy back 2nd. With your score you may even qualify for an 80/20 - meaning no money down at all.
Next, big lenders - both Washington Mutual and Countrywide - offer a product called TAMI (Tax Advantage MI) where your interest rate is .5% (1/2 a point) higher and they pay PMI on your behalf. This way, your rate is a little higher, but your monthly payment is much lower than paying traditional PMI. And - it's all interest so it's tax deductable. I did't mean to advertise for WAMU or Countrywide here - I hope I'm not in trouble - I don't think that traditional banks offer this option.
3. Subprime loan. Subprimes sound nasty but really they are much more flexible than primes. Most importantly - subprimes do not ever require PMI. Ever.
Hope this helps! And - since I come here to learn, I welcome anyone to let me know if I am incorrect here about raising the credit score.
Happy New Year Investors!
Credit Bureau's want open trade lines that are over 7 years old, they consider any credit under 7 years as "limited credit history" and your score will be lower because of it. (Closed trade lines do not affect this part of your credit score.)
Only the last 2 years of payment history are reported to the credit bureau.
If adding yourself to an existing credit card with a long history shows the "date opened" as being 12 years ago, then it will extend your credit history back past the 7 year mark. (Raising your score)
If your credit bureau is updated with the date you were added, then it will not help with the "limited credit history."
Wait until after you have been approved for the morgage and moved into your house before you do anything that could cause someone to pull a credit report on you!
A single inquiry will drop your credit score by 5 points for the next 6 months. After which they will take off 3 points for the following 6 months, then they drop to 1 point for the next year... after 2 years inquiries fall off and cease to lower your score.
Having more than 6 inquiries within the last 6 months makes you appear to be a high risk and drops your score further.
Mortgage companies do not like to see any recent inquiries when you apply for a mortgage. Inquiries appear instantly whereas trade lines can take several weeks/months. Mortgage companies must have accurate debt/income information to fund your loan, when they see a recent inquiry it raises they no longer know if the debt information provided is still accurate.
In order to get the most points from credit cards, you want NO MORE THAN 3! Anything over 3 will start to lower your score. The risk of borrowing more than you can repay is higher. You want to use no more than 20%-50% of your available credit limit.
Credit reports not only show what your current balance is, but also the highest you have ever had charged on your card. If you can keep that number under 50% of your available limit, your score will go up. Call each card every 6 months and ask for a limit increase, as long as you don't spend it as soon as you get it, this will help you raise your available credit, and your credit score.
Even if you only use 1 credit card, you should keep 3. Paying off and closing a credit card could lower your score if you end up with too few open revolving accounts. (Credit cards and lines of credit are revolving accounts and treated as the same thing by the credit bureaus.)
Also, if you have a loan which has been on your credit report for a long time with good payment history, it may actually lower your score if you pay the loan off early. Especially if it is the only loan that has been active for over 7 years.
One other tidbit: Any tradeline must be reporting on your credit bureau for a minimum of 6 months before it can affect your credit report for good or bad.
I hope this information helps everyone here.
I might be missing something here...
All the advise I've read is great and no matter what, always try to improve your credit score. I'm not seeing any comment on the fact that your score is 650. That is good. We'd all like to have an 800 but from what I know a 650 is average or slightly better. When you hit the 500's you run into fees and high rates but can still get a mortgage. With 650 you'll do fine. Try to improve but don't loose any sleep.
720 is the cutoff for the best rates. And even then, it's better if your FICO is higher ... less likely to fall below 720 for one reason or the other by the time of closing.
Also check this out:
http://www.creditinfocenter.com/creditreports/scoring/
Hey your Loan Officer is correct by suggesting your parents add you to their credit card for the time being. It's an INSTANT BOOST to your credit.
However, a 650 score isn't bad but it's graded in the lending world as "Alt-A" (Alternative A or A- Minus/B Credit). It basically means you're "NOT QUITE there yet" and it represents more risk to the lender as opposed to A+ Credit.
680 is where the goodies start and 720 or + is where the "windows to the world open up" in regards to real estate.
I'm not in the office today but I have some REALLY good references to go to get educated regarding what helps/hurts your credit.
There are a lot of myths and miseducation that get passed along to people and my belief is that EVERYONE should be proactive in finding the correct information!
I promise to post these references next week at some point! Until then go to: www.mortgage-x.com and look through the CREDIT GRADE GUIDE to see how lender's apply this matrix toward borrower's.
And you do avoid PMI through breaking up your loan into combos (80/20, 75/25, 80/15/5, etc..).
How do I know this stuff? I'm a Loan Advisor for a GREAT mortgage broker in the S.F. Bay Area!!! I do loans for a living!!
I hope this helps and good luck !
HAPPY NEW YEAR AND CONTINUED SUCCESS TO ALL! MAY 2004 BE YOUR BEST YEAR YET!
Scott:
First of all you need to order all three of your credit reports- Esperian, Transunion and Equifax. Send letters to all of them disputing any late accounts stating you have never been 30-60-90
days late. If the companies dont respond back within 21 days, the items will be removed. Second, I would have your parents put you on their account, however they must contact their creditor and give them your social security number for it to show positive on your credit report. Go and buy something for $500.00 with the card for your new house and pay $75.00 a mos. Third,
keep all your current accounts below 50% of available credit balance as this affects your score. Also, keep your inquiries to a minimum. Fourth, sign-up at ****Must Reach Freshman Investor status before posting URL's*** to monitor your
credit score. And last buy not least, I agree with the Norrist. Keep your money in your pocket for your real-estate investments and try to get in with the least amount of money down. You might even want to try to do a 80% interest only first fixed for 5 years and a 20% second.
THe most important advice I could give you is hold on to your money, educate yourself in real-estate. Save your big
down payment and attend a wholesale/
retail bootcamp by Legrand. Good Luck
I am wondering why any loan officer would have a problem getting a mortgage for you where you are paying 50K down?
I have a 779 three bureau score (through no conscious effort of my own) and haven't noticed it has done any more for me than my friends 650's-700.
Maybe you should check with another mortgage broker?
I would dispute anything that shows late as mentioned above.
Good Luck!
Your money can be use much more effectively for you if you put it on educational material. The score you have will get you the financing for the house and at a good rate.
You probably need to at least shop around with a few other loan officers. Don't have them pull your credit, just let them know what score you had and ask for their senerio's
Your real problem is you loan officer
Being added to an existing revolving credit account as an authorized user does not create an inquiry on your report.
is now muted since mortgage/auto inquiries in the last 30 days all count as just one, or in a 14 day period over the last year just count as one.
The date you are added as an authorized user does not show on your report. Only the date opened, which is the date your parents opened the account. If it is a 12 year-old account, and you are 25 years old, then it doesn't quite look right that you have such a high credit limit way back at age 13.
35% of the score is made of up your utilization, that is, the balance to limit ratio on revolving accounts. Generally, the ratio is 30%. If your balance to limit is close to 100% you earn less points. Therefore, do not close revolving accounts or you will reduce available credit and increase the utilization percentage.
35% of the score is the last 12 months payment history. So bringing an account current, and keeping it current for 12 months will reduce the risk 50% in the 13th month.
'Thickness of the credit file' is the third important factor for Fair, Isaac's scoring formula which is the length of time you've had credit.
Inquiries ("pursuit of new credit"
There is no magic number of how many cards to have. That is a myth based on misunderstanding of the 10 score cards Fair, Isaac uses to layer risk. Since you don't know which card you fall into, you don't know the optimum number of cards to have.
. . . . been doing this awhile.