Let’s start by taking a deep breath. Home buying is a stressful process. Home buying can also be frustrating and make people feel like they will never find a path to homeownership. If you already have a home, the process of refinancing can also create distress and feelings of fear, uncertainty, and doubt. The reality is that there are many budget hacks for mortgage approval. So, let’s talk about how to improve credit and how to get approved for a mortgage.
There was a time when most people were able to get approved for a mortgage. Remember that? It turned out to be a bubble and led to a housing crisis. Let’s be clear, this was not the fault of the individuals. The real fault lies with the banks. Those “subprime” loans should never have been approved in the first place. Why? Because the individuals receiving those loans did not have nearly enough income and assets to be able to pay their mortgage, property taxes, repay loans, and all the other costs associated with homeownership. It was a criminal act to put people in homes that were far beyond their means. The results were disastrous.
Where are we now? A good question. How can you make savvy decisions that make homeownership attainable? Beyond that, you want to ensure that owning your home is an asset and not a liability that lands you in a situation of financial hardship.
Credit scores range from 300 to 850. 620 is the credit score that is most often cited as the low bar for receiving a mortgage loan. To be clear, 620 is in the “subprime” category.
Let’s break down the numbers.
300 to 579 is not good.
580 to 669 is fair.
670to 739 is good.
740 to 799 is very good.
800 to 850 is excellent.
What do the numbers mean?
In the “Poor” range, a person will have difficulty obtaining a line of credit altogether. This is where you need to actively work on your credit in order to be approved for new lines of credit.
“Fair” is the category that led to many of those subprime mortgages that got a lot of people in a lot of trouble. Truly, shame on the banks for leading people on when the money just wasn’t there.
“Good” is a statement the borrower appears to be of lesser risk. Here, let’s qualify a key aspect of credit ratings. It’s a strange and uncomfortable system rating a person. The idea of “good” isn’t saying that a person is a good person. This is bank language for saying the bank can be a little less worried about getting a return on investment (ROI). Someone with “good” credit is more likely to repay a loan, in theory.
“Very good” implies a person has a consistent history of repaying loans. This will make it easier for a person to obtain a new loan or line of credit.
“Excellent” is a category that generally implies a person has a fair amount of liquidity or funds and assets at their disposal. The bank can be assured a person is very likely to be able to repay a loan. This means the borrower appears to be a safe bet for the bank.
TL;DR. Banks look at borrowers in terms of risk. A person with “poor” or “fair” credit is considered “high risk” for a bank to loan them money. A person with a better-than-average credit score is considered a lower risk for the bank. Unsurprisingly, the banks prefer to take less risk. After all, the banks are not in the business of doing favors. The banks are in the business of making money.
Credit scores used to be more mysterious. In modern times, your bank apps can provide you with a credit score in seconds. It’s important to keep in mind a hard credit check, often referred to as a “hard pull”, can impact your credit score. A “hard pull” occurs when you apply for credit in the form of a credit card or loan. Simply checking the status of your score on your own should not affect your credit score.
For a long time, the major credit reporting agencies have been Equifax, TransUnion, and Experian. When checking credit, it’s possible a bank will only check one or two of these sources.
When searching for your credit, you may come across your FICO score. For all intents and purposes, your FICO score and your credit score are essentially the same things. The numbers may vary slightly based on the sources checked, and what is found may impact your score.
Factors that impact your credit score may include:
Payment history is precisely what it sounds like. Your credit score is impacted by whether or not you have paid your debts and if you have paid them on time
Credit use refers to how much of your overall credit is tied up. Your credit score decreases when you have credit card debt, car loan debt, mortgage debt, or other liens or debts that reveal to creditors you only have access to a certain percentage of your overall credit. Your score improves when you pay down debts and have access to more credit. Some experts recommend keeping your overall credit use below 30%. Others will say that 30% is higher than ideal.
Another downside to having debt is that you are often paying interest. This results in longer repayment terms and can mean you are paying hundreds if not thousands of dollars more over the duration of the repayment period. One example is the difference between a 36 or 48 week car loan repayment as compared to 72 weeks.
Having a blend of types of credit is appealing to credit reporting agencies. They would prefer to see you have your funds tied up in a car or house as opposed to simply having a large number of credit cards.
Rent and utility payments do not play a role in your overall credit score.
Your income and money in the bank do not play a role in your credit score.
Checking your score through your bank or a free credit score service does not affect your credit score. This is because it is considered a “soft pull” as opposed to a “hard pull”. You should feel free to check as often as you wish using a “soft pull” so that you remain aware of your current credit score status.
There are many tactics that can be used for improving mortgage approval odds. Building credit is one of them. Let’s talk about other methods you can take advantage of in order to boost the likelihood you will be approved for a mortgage loan.
One reason could be your debt-to-income ratio. The appearance that you do not make enough money to pay your bills is a red flag to the bank that you are a higher risk borrower.
How can I approve my odds?
It’s actually not uncommon to find errors in a credit report. If you see one, you want to address this immediately. There is the possibility of a simple error but this could also be an instance of fraud or identity theft.
You might notice a debt you’ve paid off is still listed on your credit report. Ask for this debt to be removed.
Information on your credit report related to a former spouse could be listed and may impact your credit score.
Some information may be out of date or not updated.
Closed accounts may still be listed and this could be seen as a negative influence on your credit score.
Getting approved for a mortgage loan can simply mean you may need a co-signer while you work on generating more of your own personal income.
Always consult multiple lenders. Don’t just pick one and go along with whatever they say. Remember, their job is to make money and they are betting on you. Negotiate. That ball is not just in their court.
You can buy down your interest rate on the front end. It’s worth looking into if you have the cash on hand.
Consolidate any outstanding debts or loans and attempt to reduce the overall amount as well as your required monthly contribution.
Look into an adjustable home rate mortgage (ARM). This type of mortgage plan adjusts to market conditions. If rates go down, then you can save on interest.
When you refinance, you replace your old loan with a fresh new loan. It’s time to negotiate!
Common reasons to refinance a mortgage include:
Generally, a good time to consider refinancing is when interest rates are low. Particularly if they are significantly lower than your current interest rate. If you were locked into a loan when rates were sky high it’s sensible to stay aware of when rates reduce to renegotiate your loan to avoid overpaying for your mortgage.
Making use of the equity built into your home can be a sensible choice when considering home improvements and renovations. Alternatives such as taking out a personal loan or charging large amounts to a credit card can negatively impact your credit and result in high-rate interest repayments on debt. The interest rates for home loans are almost always significantly lower than credit cards.
American Home Shield® is there to help you make smart choices about home ownership and home warranties. We want you to keep in mind the importance of having home warranty coverage from American Home Shield® when considering home improvement projects and renovations. Proper coverage prevents the possibility of large out-of-pocket expenses in case of unexpected costs such as appliance or system malfunctions.
AHS assumes no responsibility, and specifically disclaims all liability, for your use of any and all information contained herein.