Credit Scores: The Report Card for Grown Ups

Credit reports are a lot like school report cards.  Both measure how well you are performing using various numerical grades, such as a 4.0 or a 750, and both have to be approved by a person in charge, whether it is a parent or a home lender.

If you’re not a straight A student in Credit 101, here are some tips for making the grade during the home buying process.

1. Types of Credit:   The three most important types of credit are mortgages, student loans or other installment loans, and auto loans.  Credit bureaus place the most weight on these three types of loans when determining credit score. As such, late payments on these are the most detrimental to credit scores.
2. Credit Cards:   Credit bureaus want to see credit card usage, just not too much. The balance from revolving debt, such as credit cards, should not exceed 40% of the maximum amount.  For example, if your credit card limit is $1,000, try to keep the balance below $400.  The goal is to keep the debt to available credit limit ratio low, even if that debt is spread across a few credit cards.  It is better to have two credit cards with balances below 40% of the limit, than to have one card that is always maxed out.  In reference to multiple credit cards, the optimal number of credit cards to have is 3 to 4. 
3. Credit Score Criteria:   Lenders use stricter criteria when pulling credit reports for potential home buyers.   As a result, there is often a small difference between the borrower’s individual score and the lender’s score.  For example, a potential home buyer pulls their credit score with Experian and sees that their score is 700.  It is possible that the lender’s credit report for the borrower may show only 680.  The small discrepancy is related to the type of credit inquiry, explained below.
4. Credit Inquiries:   Credit inquiries are another factor that affects credit scores.  Inquires can be from various types of creditors, and are often classified as either “hard inquires” or “soft inquires”.  Soft inquires are those that are not being reviewed by a prospective lender.  These include checking your own credit, or credit checks made by businesses to offer you goods or services. Hard inquires are those that are reviewed by a potential lender for the purpose of extending your credit for a loan.

Having your credit pulled too often, and by too many different types of creditors will lower your scores.  The credit bureaus do not view “applying for everything” as a responsible decision. The only exception is if you are rate shopping.  Credit bureaus understand that while rate shopping you may have your credit report pulled by various lenders in a short amount of time, so they rarely give you a hit on your score.

For more information about your credit “report card” and how it is used during the home buying process, please call Stuart directly at 410.491.0200 or email at septstein@baybankmd.com.

A Touching Note From Our Most Recent Client

In July my former husband and I decided to sell our marital home. Overwhelmed by the reality of moving, I assumed I would rent because I didn’t think I could qualify to buy on my own. Truthfully, even if I did qualify, I was kind of afraid to purchase. At age 54, I hadn’t lived on my own for over 30 years. Was I ready to take on the responsibility and commitment that buying a home entailed? But I discovered that anything I could afford to rent would mean no dog, no piano, and no three bedrooms. With encouragement from my former husband, I decided to see if I could qualify for a mortgage. Despite advice to the contrary, I went with a big name, national bank, and right before my eyes I was pre-approved. Quickly thereafter, with the help of my team of real estate agents (best friends for decades who were so fun to work with), I found a townhome in a lovely little area in Baltimore and decided to put in an offer. The offer was accepted and a moving date set. The process was working out so beautifully it seemed too good to be true . . . and it was. A month into the process the bank rescinded its approval because I didn’t fit the standard mortgagee guidelines.

I found out on a Friday afternoon I wasn’t getting the loan and at that point I didn’t know what to do. What could I do? My moving date was three weeks away. Technically, the sellers could put the house back on the market and find another buyer. I had no idea how to proceed, but my realtor called the next morning to let me know she’d talked to Stuart Epstein from Carrollton Mortgage Services, a Division of Bay Bank NSB, and that I should expect a call from him to discuss the possibility of a loan through them. Stuart and I talked early Saturday afternoon and he explained that his company wasn’t a “big box” bank, but a personal one that also did portfolio loans. This meant they had more discretion as to which loans they approved, as opposed to the big banks which had to follow cookie-cutter (my words) rules. He said that based on our conversation it sounded like I could be a candidate for such a loan.

On Sunday evening at 7 o’clock I met Stuart in his office. I couldn’t believe that he would take time out of his weekend to meet with a total stranger to discuss a loan, but that’s what he did. In less than an hour he explained to me that the next day the board was convening to review potential loans and that he was going to advocate for me. He told me that I would know of its decision before 11 the next morning, and that once given approval it would not be rescinded. I cannot describe how grateful and hopeful I was after that meeting.

On Monday Stuart called me shortly after nine o’clock to tell me I’d been approved! I felt so many emotions all at the same time: relief, gratitude, euphoria, disbelief. I was humbled by the fact that one person’s willingness to advocate for me could result in something so life-changing. I still am. I have a lovely place for my children when they come back from college for vacations and visits. I have something I can take care of on my own, financially & physically. I have a place to begin this next phase of my life that I can call home. All because Stuart Epstein took a chance on me and saw me as a human being instead of a file. Thank you so much, Stuart.

A Client Shares Her Experience With the Stuart Epstein Team

"I'm a 27 year old single mom of 2. I recently closed on my house at the end of August. I had a really wonderful experience with Stuart, Jen & Bob. They were there for me every step of the way. I needed about a dozen preapproval letter, and never had an issue getting one.

I've been under contract for three houses so I had to do three loan applications. The first house fell through due to repair issues. The second was a short sale. I was under contract for two months before that fell through. Luckily I found another home which is the one I'm now a proud owner of. Jen & Stuart were there every step of the way. They helped me get involved in housing counseling classes so I can have a better understanding of the commitment I was entering. They also helped me get the various grants to lessen the closing costs. Overall the experience of buying a home is overwhelming, but I had a very awesome team. I really appreciate all the hard work that went into making my dream of buying a home come true."

- Latosha

Credit Score Limbo: How Low Can You Go When Buying a Home?

Applying for a home loan with a low credit score can feel like playing a game of limbo.  Having a mortgage application denied can feel like being in limbo. 

Borrowers that do not initially qualify for a mortgage due to their credit score can shorten the time they are in credit-rebuilding-limbo with a few simple steps.  Although, it might be helpful to first understand how credit scores are used when buying a home.

Lenders pull a tri-merge credit report from all three bureaus for each potential borrower.  All lenders use the middle score, which for many lenders needs to be no less than 640 in order to qualify a borrower for a mortgage.  

If the applicant’s score does not meet the cut off, the lender will then try to determine the cause of the low credit score.  Collections and judgments are common causes of low credit scores, and must be paid before the mortgage application can be approved. 

Medical collections are different.  Medical debt that collectively adds up to less than $1,000 does not have to be paid off in order to be approved for a mortgage, so long as that debt does not affect the credit score.  Lenders will vary on this rule.  You should ask your lender about medical collections before you do anything with them.

Some creditors will take longer to update paid debts than they do to turn over the debt to collections in the first place.   In this instance, the lender can use written proof that the debt has been paid.  The document must show all the account information, borrower name, and company letterhead.  For the revolving debt, or credit card accounts, the credit bureaus like to see you utilize your revolving credit, but not too much.  It is suggested that the balance remain under 40% of the credit limit to ensure the outstanding debt can be handled and paid timely.  As always, if you remit more than the minimum payment, it is looked upon in a positive manner to show the bureaus continue credit worthiness.

Completing this step is sometimes all it takes to increase a borrower’s credit score that fell just below the cut off.  If a borrower’s credit score is too far below 640, than they may be in credit-rebuilding-limbo for a while. There are still additional ways to speed up the process.

Potential borrowers can gather up documents that show they have been regularly paying their debts, and overnight them with return receipt requests to each of the credit bureaus.  The credit bureaus will then research and update the borrower’s credit score. This usually occurs within a few months.  

Lastly, borrowers may not have to pay off all of their debt in order to qualify for a mortgage. There is a calculation system, available to some most lenders, which allows them to see how credit scores would be affected if the borrower paid off a percentage or the balance of their debt.  Although it is not a certainty, it typically helps borrowers know where they need to be in order to take out a mortgage. 

As the potential borrower pays off their debt and gathers documentation, it is always good to stay in contact with the mortgage loan officer and/or the person that is assisting you in repairing your credit.

If you have any additional questions about how credit scores affect the home buying process, please call Stuart directly at 410.491.0200 or email at septstein@baybankmd.com.