Q & A: How important is one’s credit?

Credit is one of the first things mortgage lenders review to determine which loan programs you will be eligible for.  A tri-merge credit report is pulled which obtains your credit score from the three major credit reporting bureaus; Equifax, Trans Union, and Experian.  The mortgage lender will take the middle of the three scores.  Most first time homebuyer programs with minimum down payments will require at least a 620 middle credit score and there should be no late payments in the past 12 months reported on the credit report.  The higher your credit score, the more likely that you will be approved for the mortgage program that you are requesting.   Also higher scores would tolerate a minor late payment in the credit history in the last 12 months where the lower scores would not. 

The interest rate you receive on a mortgage loan can also be directly correlated to the credit score you have.  The higher the credit score, the better the interest rate you may be eligible to receive. 

If your credit score is not where you would like it to be, talk to your trusted Bell Mortgage Loan Officer.  We can advise you on how to improve your score thus increasing the mortgage options you have available to you.  You can obtain a free copy of your credit report once a year from www.annualcreditreport.com.  This report will show you the information reported to the three major bureaus but it does not give you the credit score. 

When we pre-qualify you for a mortgage loan you will receive your three credit scores and we can answer questions about what is being reported on the report.  Your credit score can also be obtained by purchasing a report from one of the major bureaus.  You can usually get just the one bureau’s score for roughly $15 or get all three scores for roughly $40.  Beware each of the bureaus offer a free credit score if you enroll in a credit monitoring program.  There is a fee for the credit monitoring program so read the fine print.  There is nothing wrong with a credit monitoring program as long as that is what you want.

Sometimes improving your credit score is as simple as paying down your credit cards so the outstanding balance owed is 30% or less of the available credit limit or calling the creditor and requesting an increase your limit so you are closer to that 30% mark.  Your credit score looks at how long your accounts have been open, that the payments have been made on time as agreed, and on revolving accounts how much you owe compared to the limit on the card.  If your outstanding balance owed is close to the credit limit, your score is lower than if you owe a smaller percentage of the limit. 

One of the most important steps to rebuilding your credit after a period of derogatory reporting is to give the credit bureaus good information to off-set the bad.  If you do not have multiple accounts reporting to all three bureaus with on-time payment history, you are going to have to establish some new accounts to build or repair this history.  That may require you to open a few secured credit cards.  Secured credit cards are accounts where you give the creditor a deposit and they give you a credit limit on a credit card to match the deposit they are holding in your name.  You will pay an annual fee for a secured card and you may pay an upfront charge to open the account.  When you close the account in the future or the creditor converts it to a traditional credit card, the deposit you gave them will be refunded back to you in most instances.  Always read the fine print to ensure you understand the terms of the account.

You do not have to carry a balance on the new secured cards but you do have to use them every few months or so to keep them active.  I usually recommend having between 2 and 4 accounts depending on what other credit history you have.  I have my clients charge something small that they would be buying anyway like a tank of gas or a gallon of milk.  When the bill comes in the mail, pay it off in full.  Once the first card is paid in full, then you can use the next card to do the same thing.  Never charge more than you can pay in full when the bill comes or more than 30% of your credit limit on the card.  For example; if you have a $500 limit, never charge more than $150 or the amount you can pay in full when the bill comes.  If you rotate through your cards with this charge/ pay-off pattern, this is the quickest and best way to rebuild your credit.  Each card only gets used every third or fourth month.

Outstanding collection accounts do have to show as paid or closed but talk to your trusted Bell Mortgage loan officer to determine if they should be paid in full now or at the time you purchase your house.  Depending on how old the collection accounts are at the time the report is pulled and how many of them exist will determine if it is best to pay them off now or wait and pay them off at closing. 

If you have no credit score because you have not used credit in the past few years or never had credit before, opening 2-4 secured cards is a way to establish a credit history and generate a score.  Once you have a solid payment history of at least a year or more you can contact the creditors about converting your secured cards to traditional cards.  Once you have six months of payment history you should have a credit score with all three bureaus and we can see about mortgage options for you. 

Each person’s credit profile is unique and what would be needed to increase the credit scores can vary.  We are more than happy to answer your questions and work with you, if needed, to improve your credit in order to make the dream of home ownership a reality.  If you have any questions about credit or the mortgage options available to you, contact your trusted Bell Mortgage Loan Officer.  If you don’t have someone you work with, feel free to give me a call at 763-360-5114 or email at cstuntebeck@bellmortgage.com.

 Cheryl Stuntebeck

Senior Loan Officer

Bell Mortgage a Division of State Bank & Trust



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