Mortgage Credit: Some Do’s and Don’ts

If you are looking to purchase or refinance a home in the near future, there are some basics things to do and to avoid doing in order to keep your credit rating intact.  With credit scoring often determining the interest rate at which you can borrow money, keeping your credit rating as high as possible can save you thousands of dollars annually.  This is particularly important these days as most lenders require a minimum fico of 620 for FHA, VA, and USDA loans.  Fannie Mae imposes various credit score hits for FICO scores that fall below a 740-620 credit score.

Here are a few quick basic tips and some information derived from www.myfico.com :

• Do stay current on your existing accounts.  Your payment history is the most important part of your credit rating, comprising 35% of your credit score.
• Don’t max out on any existing credit cards.  Other than being late, having credit over your credit limit is the quickest way to reduce your credit score. Credit balances comprise 30% of your total credit score.
• Don’t consolidate credit cards into 1 account at a teaser rate.  Consolidating cards to one account will show a higher balance to limit ratio and you could be penalized.  Typically, you do not want your credit balances to exceed 70% of your available limit.  Being below 50% of your available limit is even better.
• Don’t pay off any old collection accounts.  Collection accounts over 2 years old have little impact on your credit rating.  Paying off an old collection account will change the last activity date of your credit and potentially lower your score.  Of course, you may be required to payoff any collection accounts at closing anyway.
• Don’t open any new accounts, particularly “1 year same of cash” type store accounts.  Wait until after closing for household purchases such as furniture.  New accounts comprise 10% of your total credit score, and your “credit mix” comprises another 10%.

FICO Credit Score Components
• 35% Payment History
• 30% Amounts Owed
• 15% Length of Credit
• 10% New Credit
• 10% Type of Credit 

Do be sure to meet with a mortgage professional to get pre-approved as well as review your credit report with him/her.  Regardless of what stage in house hunting or refinancing you are in, it is a good idea to be sure you are looking in the proper price range for your budget.