Improve Your Credit Score &
Shopping Interest Rates
Credit Affects Interest Rates
Credit Scores and FICO scores make a big financial difference when you get a home loan. If you have poor credit and get a loan anyways, the interest rate may be higher for 30-40 years. Therefore it’s important to do what you can to make your credit score higher. So, let us give you a few tips that we’ve learned in the last 25 years as top-producing Realtors, and you can create your own Plan of Action.
#1 Get Your Credit Report-
First, get your credit report- hopefully with a FICO Score, but that’s not mandatory yet. Thanks to an act of Congress, you can download one free credit report each year without your FICO score at www.annualcreditreport.com. You may want to check with your credit card companies to see if they offer a free credit report with a FICO score.
Once you have a copy of your credit report, please read it carefully. If you find any errors on your credit report, even small ones, contact the credit reporting agencies immediately. Each agency will tell you their procedures to get inaccurate items corrected. Statistics say that over 20% of Americans have errors in their reports, so challenge this inaccurate reporting. The FTC has great videos and contact information.
#2 Pay Down Debt
Meet with a Home Lender for a free consultation. Try to pick a very experienced one. You can consider this person as 1 of 3 you’ll interview. (See the questions to ask below.) Take your credit report from step #1 with you. The lender will calculate if you are better off paying off credit cards or paying down loan balances instead of putting down a larger down payment.
Car loans with 10 or fewer payments left don’t count in your debt ratios. Lower debt means you’ll qualify for a higher loan amount. Remember to keep your home loan in your comfort zone vs. what you qualify for.
#3 Credit Cards
Most people are successful in paying off small credit card balances and then closing those cards. Keep using 1-2 major cards – you need to have open credit lines. Department store credit cards – even with a zero balance – will have the minimum payment added to your ratios. If you have 10 unused cards, that can take at least $200 a month off the income numbers a lender uses. Juggling money by maxing a card limit or transferring one credit card’s debt to another will lower your credit score.
We have a newer blog on 8 Ways to Improve Your Credit Score.
#4 Waiting Might Help
Each creditor reports your 12-month payment history. If you’ve had a hard time making on-time payments recently, you may want to wait until a year is up. Waiting could also increase your score.
Home Loan plateaus like “over 720 FICO” and “under 680 FICO” determine the interest rate you pay. During your free consultation with a home lender, get some guidance about your unique situation.
#5 Avoid Finance Company Loans
FICO Scores are computed and made up of many factors, and no one knows the exact formula. One of the things they do know is that finance company loans lower your score. Since their interest rate is usually higher, it’s considered a sign of poor credit management to a home underwriter. You’ll probably want to pay those off too.
NOTE: DO NOT MAKE NEW PURCHASES UNTIL YOU CLOSE ON YOUR HOUSE!
Pay Attention To This! Once you’ve started the process, do not buy a car or home appliances or furniture or spend cash until you own your new home. Spending money and creating debt will increase your debt ratio, lower your reserves, and/or lower your credit score. Because you are unique, at least agree to consult your home lender first. The lender will run a credit report when they take your official application and again before closing.
When you think you’re ready to buy your home, interview three lenders on the same day. Credit report inquiries can lower your FICO score. We suggest getting your credit score online that day than calling the lenders/banks you’re going to interview. By giving them your average credit score number, they can use that to quote interest rates and fees. Whatever lender you choose can then run your credit and get you pre-approved.You should try to get quotes from 3 different sources. Check your credit union or bank’s home loan division, a friend’s home lender, and a lender, your Realtor, refers you to. Always use the “local branch.” When you’re ready to get quotes, talk to the first lender to decide on a type of loan program and get quotes for the same type of program from two more lenders.
#7 Questions For A Home Lender
Home buying title and escrow closing costs will be the same no matter which lender you use, so keep it simple. Ask all 3 lenders :
“I have a ______ FICO Score. If I put _______ dollars down and borrow______ dollars:
- What Is Today’s Interest Rate?
- What are your EXACT Loan Charges and junk fees?
- Once I sign, how long does it take to fund your loan?
Even if you change your loan program or if the interest rates change, you’ll still have compared companies and know which one you want to use. Beware – large banks give very slow service, and a borrower must fit into the perfect customer box to be approved. If you like one lender and the other guy charges a lower rate, ask the one you like if they’ll match the lower rate.
Now find a house, and since you’ve compared lenders already, choose one, and they’ll want a copy of your accepted home purchase contract. Being prepared ahead of time will take the pressure off your time at this point. Congratulations! Start packing!
This website and information are made available for you to explore by Kurt Grosse with Realty One Group. Kurt is a Las Vegas Top-Producing Realtor since 1996 and a Retired Nevada Building Engineer (P.E., C.E.). His goal with his buyers and sellers is to use his skills and knowledge to protect them in this ever-changing Las Vegas Real Estate Market. With how quickly homes are built in Southern Nevada, his skills are invaluable.