This is part 2 of everything you need to know about credit when it comes to buying a house. How can you improve your credit score? What do you do if you don’t have a credit score? What’s the difference between collection accounts and charge offs when dealing with credit.In this episode, we take a deep dive into the world of credit and credit scores where we discuss the credit score model, the changes coming and how to maximize your credit to help you become The Educated HomeBuyer.
Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith
Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: firstname.lastname@example.org ➡I N S T A G R A M ➳ https://www.instagram.com/borrowsmartjosh ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart
✅ – Want to get connected with us or to a local expert in your market, please reach out at http://www.theeducatedhomebuyer.com/expert
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Show Notes Below:
[00:00:00] Jeb Smith, Huntington Beach Realtor: In last week’s episode, we ended with how to maximize your credit score, and we were actually talking about credit utilization. So Josh, why don’t we just go back a little bit here and just recap credit utilization and the importance of credit utilization, and then we’ll talk about some other things that you can do to actually help maximize your credit.
[00:00:28] Josh Lewis, California Mortgage Broker: Perfect. So credit utilization is the proportion of the potential balance that you use. So if you have a credit card with a $1,000 limit and you have $500 charged on it, you’re utilizing 50% of your available credit. So they’re gonna look at that, the credit bureau and the algorithm for generating your credit score is gonna every one of your accounts. And then we’ll actually also look at them in aggregate as well, your total available credit and total use credit. But for our purposes, what we’re gonna talk about today is how to optimize your credit score by keeping the credit utilization within the ideal range.
[00:01:06] Jeb Smith, Huntington Beach Realtor: Right, and are there thresholds in there that are important? I’ve always heard, Josh, that 30% of your balance, you don’t wanna spend more than 30% of your balance or keep a balance above 30% for an extended period of time, because that ultimately helps, ultimately hurt your credit score, if you will.
So, if you have a $10,000 balance, you essentially wanna be sitting somewhere around $3,000 of that limit, if you will, when the bureaus actually report. You mentioned something last time that said even less like that, if you can get it even lower than that. So what are those thresholds, why are they important? I think that’s something that a lot of people need to understand.
[00:01:44] Josh Lewis, California Mortgage Broker: Let’s start with what is ideal credit utilization from the bureau’s perspective. Here’s a quote from the senior director for FICO says, consumers with FICO scores of 800 views on average seven. Of their available credit. So the ideal range is [00:02:00] 1% to 9%, so below 10%, but you want to be using your credit.
It’s very important to note that a lot of people think, “Hey, I got in trouble with credit in the past. I paid everything off and I don’t even use it”. Well, the model cannot see how you deal with credit on a month to month basis. So you need to be using them and keeping a balance. And some people say, “Well, I pay mine off every month”.
The good news on that is, your payment rarely coincides with the cycle of when the creditor reports to the bureaus. So from that perspective, you may pay it off every month, but if you’re using it on a regular basis, there’s gonna be some balance on there. I get that question all the time. I’m talking to people about getting pre-approved for a loan and I go “OK, it looks like your credit cards are about $187 total in terms of the minimum payments”.
They go, “Oh, no way. I pay ’em off every month”. I go, “Awesome. But it doesn’t perfectly coincide with the reporting cycle of when the creditors report to the bureaus. So we’re always gonna show some sort of balance and some sort of limit”.
In a perfect world, we wanna say sub 10%, but have some balance on there so that the model can see you are using your credit effectively.
[00:03:10] Jeb Smith, Huntington Beach Realtor: No, at the same time, like my balance on my card’s due on the 10th of every month, but I’m paying off what’s due in that cycle, but I’ve already charged on the next cycle. So even though I’m paying. The balance off, if you will. There’s already a new balance on that card because it’s already billing into the next cycle.
So like Josh said, you’re likely going to have something report on your credit report, which in theory is a good thing as long as you’re paying it on time and what have you. So the idea of getting a credit card, Josh, and locking it, freezing it if you will in you’re freezer and not not using it, which I’ve heard right. Almost like a Dave Ramsey approach. You know, cut ’em all up. Isn’t ideal?.
[00:03:43] Josh Lewis, California Mortgage Broker: It’s not because the model can’t see how you are using that credit. A lot of times we’ll talk to people who don’t have a credit history, so with no score, the only way they can get a credit card is to go out and get a secured card.
Even with that, we want [00:04:00] to use that. So use it minimally. Set it up to pay a couple of your bills, pay your cell phone bill, pay your auto insurance. Things that you’re going to pay regardless. You don’t have to go out and buy new things every month to utilize your credit. You can use the credit cards to pay things that you’re gonna have to pay every month.
Jeb, let’s circle back to what you. 30%. 30% is a great number to shoot for. Like we said, those credit, uh, borrowers who have high FICOs 800 and above keep it in that 1 to 9% range, but most people utilize their credit on a higher level than that. So if you keep it under 30%, you’re still going to have a very good score.
The reason being is the model is looking at it saying, “yes, this person uses credit. They are borrowing money, but they’re borrowing a relatively small amount to what they could potentially borrow”. So sub 30% is ideal. If you can’t keep it in that one to 9% range, the next threshold is keep it under 50%.
We see a fairly significant hit if you get over 50%. The next one would be 70%. You see, again, another hit and these aren’t just true breaks, right at 70%. The higher you go, but it does seem to be more significant at 70%, 90%, and then obviously a 100%.
You guys would be shocked to see a credit report of a borrower who has perfect credit. I’ve had borrowers that were previously 800 credit score borrowers come back to do a refinance and say they were consolidating debt from having done a big remodel on their house, and they’ve maxed a couple of credit cards and they’re actually over limit. I’ve seen those people in the low 600s having never missed a payment just because they overextended and went beyond the limit on their card.
So keep in mind that life happens. If you need to borrow, if you have to tap your credit cards right now what we’re seeing is consumer credit card balances are higher than they have been in years, consumers are still spending in the face of high inflation, but they’re doing it largely on [00:06:00] credit cards versus money out of their bank accounts.
If you are in that situation and you have to do it, just be aware of those thresholds and how it’s gonna impact your credit score. So ideally, 1 to 9%. Next, keep it under 30%, then keep it under 50%, keep it under 70%. Once you get above 70%, it’s gonna be really, really difficult for you to have a 700 score, especially if that’s across multiple cards. It’s possible if there’s just one, but multiple is gonna be really hard.
[00:06:27] Jeb Smith, Huntington Beach Realtor: The thing I would add to that too is that, on a month to month basis, this isn’t something a consumer, should be really overly concerned about. It’s when you’re going to buy something like a house and you’re going through the preapproval process, or you already been through the preapproval process and you’ve been pre-approved.
At that point, you want to start to pay attention to where your balances are and what you’re doing. You’re going to buy a car at some point in the future. I things that you want to pay attention to, but for the majority of people out there, you’re not watching, your credit utilization, so to speak, on a monthly basis.
I wouldn’t say the majority of people are. When it becomes something that you’re gonna purchase that big thing, and credit is going to become a big portion of the rate, the fee, what’s involved in that. I think that’s when you pay a little bit more attention to it.
But with that said, Josh, what are some things you can do? You can pay your balance down, right? But the majority of people out there, I would say, and again I’m stereotyping and saying, Hey, listen, if you’ve got, a large credit card balance, Might not have a lot of money in the bank, that might not necessarily be true.
But you know, if I say, “Hey, pay your credit card balance down to less than, 30% of the balance or less than 50% of the balance”, and people don’t have the cash to do that, what are other options people can do to help that that utilization rate improve and in turn improve the.
[00:07:43] Josh Lewis, California Mortgage Broker: It’s a great question. And let’s flash back to the last episode, Jeb. We talked about the two biggest factors of your credit score encompass 65% of your credit score. 35% is payment history. Your payment history is basically a fact. It hits your report, it is what it is. If something’s erroneous, you can get it [00:08:00] corrected, but that’s hard to fix.
Credit utilization is easy to manipulate, and we can get your credit score brought up a large amount in a fairly short period of time. You would be surprised, Jeb. I get people all the time who’ve been saving aggressively to put a bigger down payment, and while they’re saving aggressively, they’re having to use their credit cards a little bit more.
So sometimes it is possible that we say, Hey, instead of doing 10% down and having a 685 credit score, we can use 5% of that money, pay your credit cards off and you got a 780 credit score and we’re gonna do 5% down. You’re gonna have a lower rate, you’re gonna have lower mortgage insurance, all of those benefits.
So it’s just a, it’s a trade off there. But like you. Some people, if they’re relying on their credit cards, that is not an option. So one of the things you can do is transfer balances. A lot of times we’ll have a client that we look over and here’s an open credit card that has a $5,000 limit and it has a zero balance on it.
And then we got a card over here that has a $5,000 limit with $4,000 on it, and they’ll say, “Oh, that’s my Costco card. I get rewards for it. It’s my Amazon card. They gimme points, they gimme 5% back for my purchases in the big picture”. That’s cool. And that might be smart for managing your finances. In the short term for a mortgage loan and maximizing your credit scores. What we probably wanna do is move some over to one of those other accounts.
That’s an easy one if you have it. If you don’t. You can reach out to your creditors. Say same thing, you owe $4,000 on a $5,000 limit card. Reach out and ask ’em to increase the limit. If they were to say, increase it to $10,000, now we’re at 40%, we’re under 50% utilization.
But even if they just raised it to $7,500, we’re still under 70% and that alone, once the new limit is reported to the credit bureaus, will have a nice impact on increasing your credit.
[00:09:48] Jeb Smith, Huntington Beach Realtor: Good stuff. So something we didn’t mention at the top of the show, if Josh sounds like Kermit the Frog, it’s because he didn’t get kissed by the princess and is slowly turning into one.
No, he’s been sick [00:10:00] and we had to record this. So you’re getting what you get. But it’s all good information. So hopefully you guys are following along. So next thing, Josh, let’s talk about inquiries. Inquiries are a big thing, right? You talked. When you get your score from the bureaus, if you will there’s typically a couple of things that they report when they give you your score, right?
What’s affecting your credit score and looking at a lot of credit reports in my lifetime, in my career, one of the things I’ve seen often that, that affects people’s credit score is the number of inquiries reported. So, just what is an inquiry and why is that important in, in the big scheme of things,
[00:10:33] Josh Lewis, California Mortgage Broker: Anytime someone accesses your credit for the purposes of granting you credit, that’s gonna be a hard inquiry and that will have a negative impact on your credit score.
Inquiries get a bad rap because especially for borrowers with higher credit scores, they have a very minimal negative impact, one to three points, and they heal fairly quickly. The more important thing to be aware of. I get people all the time and they’ll say, I had someone pre-approve me last weekend, so I don’t want you to pull my credit.
Say, well, that’s silly because the CFPB gives you a 45 day window for major purchases auto loans, mortgages, student loans, that type of stuff. You have a 45 day window. You can have as many inquiries pulled as you want. So let’s say me and 14 other lenders all pull your credit on one weekend while you’re out considering buying.
That’s treated as a single inquiry. Those inquiries are identified as a mortgage inquiry. So as long as it’s a mortgage company pulling and you’re within a 45 day window, do not worry about it. Let as many lenders as you feel comfortable talking to pull that, but keep it within. The CFPB says 45 days.
I would definitely keep it within 30 days. For your own San. You’re, figure out who you’re gonna talk to and have ’em look at it within a two week window. So let’s talk about Jeb. The types of inquiries that can be really negative for your credit, it’s when you go out and could be out of necessity, could be out of just ignorance and inquire for three or [00:12:00] four or five credit cards in one weekend.
And why would someone do this? The model doesn’t know you may be in dire straits and you’re just trying to access money anywhere you can. So you apply for five credit cards and you wanna take cash advances, all of them. You also may have gone out and got a new apartment and you need to furnish it. You have no furniture, you have no tv, you, so you go to Crate and Barrel, you go to Ikea, you go to Pottery Barn, and they all say, we’ll give you 20% off.
You open all of these cards. Credit card inquiries and multiples, especially if you open new accounts, will have a negative impact. So when you get in that window, when you’re thinking of qualifying for a mortgage and buying a house or refinancing, Keep new credit cards to a minimum if you wanna open one, no big deal.
But Jeb, I don’t know what your perspective is on this. The biggest thing that drives me crazy is I see people with perfect payment histories that use 7, 8, 10 credit cards, and I’m like, simplify your life. Pick one or two or three cards that have some sort of reward that you like and keep your balances to those cards.
[00:13:04] Jeb Smith, Huntington Beach Realtor: I agree with that. I also struggle with the idea that I don’t like to have a lot of credit cards personally, like I just, even though it’s available credit or what have you. And so I’ll get to the time, for example, I have an American Express, right? And I pay on that card every year. It’s expensive to have that card, but I’ve had that card for 15 years that particular card.
And so by getting rid of it, my, my brain says, That might be a negative. If I close that account, that might be a negative. So therefore I keep that card to continue to pay on it, even though, I could probably go with another card that costs less and what have you. So I get it. But I also get the idea of why people do what they do for silly reasons.
If nothing else. So having available credit is you also don’t want to have no credit, close all your accounts, right? I mean, like we mentioned Dave Ramsey a lot and he has a lot of good methods for certain things. But, one of those things is like closing, your credit accounts, so you can’t spend on cards and paying off your balances and cutting them up and then whatever.[00:14:00]
Yeah. Great. If that’s your idea of, credit utilization, but it could set up a problem when you go to, to get a mortgage or buy a car or what have you, just because. You don’t have any credit. You’re not using any credit and the bureaus look at that negatively. But Josh, let’s talk about the idea of disputing inaccurate information.
One of the, one of the last things you can really do to help improve your score, if you will should you use a company online to do this? Pay somebody a monthly fee to be a part of this. Is this something you can do? I have mixed feelings about this, but I’d love to know your thoughts.
[00:14:32] Josh Lewis, California Mortgage Broker: If you’re talking to a credit repair company and the primary tool they use is disputing things on your credit, things that you know to be accurate, that is, it’s a pretty weak tool. What will happen many times is during that dispute period, the creditor will either take it off your credit report or they’ll mark it as in dispute, and it doesn’t have the negative impact on your score during the period that they’re actually doing their investigation.
Nine times out of 10, they’re going to come back on. We use a credit repair company that is one of the tools in their arsenal, and they do have some success with it. There are creditors who are just like, it’s easier to remove this negative reporting than it is to do the investigation and get back to the customer.
But major credit card companies at Capital One, Chase Bank, B of A, Wells Fargo. They don’t wanna set that precedent. They’re gonna go and they’re gonna do the research and go, no, here it was, you didn’t make your payment in 2019 November, probably outta town, whatever the thing was. So there are companies that, this is basically all they do.
It’s just bombard the bureaus and the creditors with disputes of accurate information. So you can have some success with it, especially with smaller creditors that don’t want to take the time to respond. But that’s not gonna be a huge strategy for boosting your score. And I wouldn’t go to a company that that’s the number one thing that they want to talk to you about, that they’re gonna do for you to improve your score
[00:15:56] Jeb Smith, Huntington Beach Realtor: And the one thing I’ll say is, the reason I have mixed emotions is because, yeah, there’s [00:16:00] companies out there that will help you with this stuff, but I will say that there’s nothing that they’re. That you can’t do yourself. And again, that’s like anything, right? I could paint my house, but it’s probably better if I hire a professional to do it.
I would say same thing with that, but some of these things I’ve had success, in the past with clients. This has been years ago with a letter sending it in and having things removed and without them having to pay. It changes and some of these companies are worth their wait in gold, others are not.
So just make sure, if you’re working with one of these companies, you’re working with somebody that’s reputable, you know somebody that’s used them there’s a referral almost. Because at the same time there’s a lot of companies out there just taking money and making claims and not really doing much about it, but.
What about we’re gonna talk about some collections that’s in charge offs and some things that are changing in that world with regards to your credit, Josh, but what about Experian? Experian has something called, I think Experian Boost. It’s supposed to help your credit score. In fact, I think I saw a commercial yesterday, the day before about Experian Boost. Does it work? Is it legit? What are your thoughts?
[00:17:00] Josh Lewis, California Mortgage Broker: So it absolutely works, but it’s not a magic cure all. Let’s look at it from this perspective. What they do is they have you authorize access to your bank accounts where you’re paying things like utilities, cell phones and what it does is they then add it into your Experian file.
And if you don’t have good depth of credit. What that will do is boost your score, just like they say, Experian Boost. Here’s the issue on the mortgage side, we’re gonna pull all three bureaus. We’re gonna use the middle of your three scores. So let’s say Experian is already your high score. Doesn’t really help us that you boost it by 20, 30, 50 points if it’s your median score, if it’s the middle, and that’s the effective one we’re gonna use, that could be very helpful that we get it up 20 or 30 points.
If it’s the low and even after boost, it’s still the low. Also gonna have no impact. The big thing that I would say is some of the jumbo lenders, some of the non QM lender, They don’t like this, they feel like you’re manipulating the credit score and they’ll make you [00:18:00] remove boost. It’s not common. So I don’t think it’s a panacea.
It’s not a cure all. It’s also not a bad thing if you want to do it and it helps you get your score higher and it makes you feel better and it may help you with store cards, it may help you with an auto, by all means go ahead and do it, but don’t think it’s magic. Got it.
[00:18:15] Jeb Smith, Huntington Beach Realtor: So now I wanna talk about collection accounts medical accounts, charge offs, that sort of thing. You know, paying ’em off. Does that actually help? We talked about a new model coming in. Let’s talk about just the whole thing here with, charge offs and collection accounts. Let’s start, maybe talk about the difference between the two. Talk about some of these ways that, that things are changing.
[00:18:35] Josh Lewis, California Mortgage Broker: A collection means that a creditor has given up on you making your payments, you’re at least 90 days behind, probably more like 180 days behind. And some of them have in-house collection departments. They report that they’re gonna close the account, send it to collections. It could be internal collections, it could be a collection agency.
And the collection agency is either doing it on retainer and they split what they collect, or they’re buying the account for pennies on the dollar and they get to keep what they collect. Either way. It’s a bad thing. It’s something that’s going to hit your score fairly negatively. The size of it will also dictate the magnitude of the impact and what is a charge off from there.
After a while, the collection agency or the internal collection department will want to write that off. They’ll just write it off as a bad debt, and that means they’ve charged it off. They’re no longer trying to collect it. So on the mortgage side, A mortgage lender looks at a charge off as better because no one’s coming and trying to get that from you or collect that from you.
On the other side, a collection, they’re gonna say, For the most part, Fannie Mae and Freddie Mac, DU, the automated underwriting engine is gonna look at it and it’s gonna say, we see the collections. We’re okay with it. It’s already in the credit score. It’s already impacting your pricing, your mortgage insurance, all that.
Or it may come back and say, we don’t like that. You need to pay these things off. It’s pretty rare that I see them being asked to be paid [00:20:00] off by Fannie Mae and Freddie Mac’s automated underwriting system, it’s more often that you just won’t get the loan approved.
FHA looks at it a little bit differently. Collections, $2,000 or less, do not need to be paid off and don’t need to be considered. So one credit, one one collection for $1,800, no problem. Two collections for $900 totalling $1,800, no problem. Three collections for $900 totalling $2,700. Now we have the total. We either have to pay them. Or we have to hit you with 5% of the total balance as a monthly payment, and still it’s gonna go through FHAs Total scorecard, and it’s gonna have to be okay with your credit.
The last one is VA. VA’s gonna look at it more case by case. If they’re automated underwriting writing engine comes back and says it’s okay, primarily what they’re looking to see is that the veteran does not have a history of not paying their bills. So it can be a problem, not a guarantee. Most of these are all case by case.
Collections. Charge offs, can’t really say one is any better than the other. They both have negative impacts on your score. Charge offs tend to be older. So, for what it’s worth, you wanna avoid these as much as possible cuz they will have a fairly large negative impact on your scores.
[00:21:10] Jeb Smith, Huntington Beach Realtor: Now let’s talk about medical collections. I think this is probably one of the bigger things that I’ve seen personally hit people’s credit and have a negative effect. So there’s some changes with regards to medical collections, how they’re going to be reported, the amounts, all of that good stuff. So maybe just talk about, how medical collections affect you now and what we’re going to see as these changes take place.
[00:21:30] Josh Lewis, California Mortgage Broker: So the changes that have already been implemented and, and let’s first talk about what’s different about a medical collection. If you’ve ever had a medical procedure, let’s say you get in a car accident and you go to the emergency room and you do a week in the hospital, you could have had 20 different providers work on you and bill you and the billing should have gone to insurance.
Insurance pays, doesn’t pay. You don’t know. So it’s very easy in those situations for someone with otherwise a perfect credit record, to have something go to collections that’s a medical bill. So [00:22:00] creditors in the mortgage space have always looked at those a little differently than not paying a credit card or having a car repossessed.
They’re just different. So now that’s been formalized by the government and we’ve had a couple of changes already implemented, and we have another one coming in June of 2023. The biggest one is unpaid medical collections can’t be reported for 12 months. So you don’t have the situation where you’re not even aware of an account and then boom, it shows up a as a collection.
When you go to have me pull your credit report to get pre-approved for a mortgage, the better one is that paid medical collections are no longer allowed to be reported. We used to, and we’ll talk about this a little bit, should you pay off your collections and charge offs or leave them be? It used to be, we would say it’s a medical collection, medical collection agencies are very good about a pay for deletion. You pay it, they’ll give you a deletion letter and make it go away. Now that’s just the law, the land. If you pay a medical collection, it’s gonna take a period of time, but it’s going to come off of your credit,
So it can’t be reported for 12 months. Once you pay it, it will come off your credit and won’t linger there for seven years like a standard collection account. The one that we’re not gonna have until June of 2023. Any medical collection under $500 can’t be reported. You’d be surprised, we see little things like a $20 copay not paid, and it ends up being a collection and dinging someone 50 points who has an otherwise perfect credit history.
So after June of 2023, medical collections under $500 won’t be allowed to be reported.
[00:23:26] Jeb Smith, Huntington Beach Realtor: Okay. And I think the question that a lot of people are asking is, is does paying these things off when they do report on your credit, actually improve your score.
[00:23:36] Josh Lewis, California Mortgage Broker: In the short run, they will generally have a negative impact especially with a charge off. So a charge off, let’s say three years ago, a creditor stopped trying to collect, they sent it to a charge off status. So the date of last activity on that would be three years ago. If you go and pay it off now, in the long run, that’s gonna be better for your credit score, but in the short run, the date of last activity makes it look like we have this negative credit [00:24:00] event here very recently.
So, if you have collections or you have charge offs like we just talked about, the type of loan you get is gonna dictate whether they need to be paid off, whether you can be approved with them as they sit. For the long haul, you probably do wanna pay them off, but for the short run, talk to your mortgage professional and go through the process of a full automated approval before you decide what to do, unless you know that you have a creditor agreeing to a pay for deletion. Any creditor that says, yes, we will delete this. If you pay us and you want to do it, go ahead and do that.
What I will say is don’t get don’t get tricked into paying something without something in writing. Have them fax or email you a letter that says we are agreeing to accept $X dollars as payment in full and we’ll delete this from all three credit bureaus upon receipt of payment, good through this date. Then you follow through, pay it off by that date, and if they don’t give you the deletion letter, you have something that says that they had agreed to deletion based off of you paying.
[00:24:58] Jeb Smith, Huntington Beach Realtor: Good stuff. And Josh, you mentioned something that there, you mentioned working with your mortgage professional. If you guys are listening to this, you don’t have a mortgage professional, maybe you’re starting the process, you’re working with somebody, you don’t trust them. There’s a link in the description of this podcast that’ll get you to somebody that Josh and I know, like, and trust that can guide you through that.
And it makes sense of the situation and really help explain all of this and walk you through it. So be sure to check that out.
Now, Josh, what about Rescoring? You’ve talked about doing some of these things and improving your score. When I was doing loans, what, eight years ago at this point? Nine years ago was the last loan I think I did. There was something called a rapid rescore. Is that still around? Do you still do them? Do they make sense?
[00:25:38] Josh Lewis, California Mortgage Broker: A rapid rescore is a very important tool. All of the things that we just talked about, a pay for deletion on a charge off. Paying down a credit card. Paying off a credit card.
We could be in a situation where you have to wait 30 days for that billing cycle to go through. I’ve seen a paid collection not get reported for 90 days, 120 days. They’re not in a rush to get [00:26:00] that corrected. What a rapid rescore allows us to do is to go to each of the bureaus, provide documentation of what needs to be corrected.
Hey, the balance is now lower. This account is paid off. This collection, this charge off is paid off. It has to have, the account number, has to have your name, has to have a phone number at the creditor work and be called and verified. So what happens is, since this is technically incorrect information being corrected in your credit file, you are not allowed to pay for it.
So, we as the mortgage professionals end up paying for it. What does it cost? It’s about $40 per trade line per bureau. So let’s say we have five cards that you have maxed and you have money sitting in the bank, you need to pay them down. And all three of your scores are impacted negatively.
We’ve got 15 lines of credit across all of those bureaus and it’s 40 bucks pop. $600, and you can’t be charged for it. And that may sound crazy, but I was just in a room with a bunch of loan officers and we were talking about credit, and someone asked, what was the most you ever paid for a rescore? One of the girls in the room had paid $1,400 of rescores for a borrower.
And the best part about that, and I used best in a very loose term there, the borrower took their new score, went back to another lender and closed the loan and she never got her $1,400 back. So, if you have someone that’s being very helpful in working with you on the rapid recore and paying that stuff for you, don’t be a jerk and go somewhere else and get your loan.
[00:27:22] Jeb Smith, Huntington Beach Realtor: Josh, your voice sounds like it’s teetering out here. There’s something that we have in our notes here that I actually don’t even know what it is, and we’re gonna, I’m gonna learn with the listers out here when we talk opt out pre-screen. What is an opt out pre-screen when it comes to credit?
[00:27:35] Josh Lewis, California Mortgage Broker: So opt out pre-screen is you’ve probably seen these pre-screened offers of credit. Something shows up in your mailbox and it says, Hey, here, I’m offering you a credit a credit card. That’s essentially a preauthorized credit card or, Auto loan or mortgage.
You’ll see if you apply for a mortgage with us, what happens is there are companies that are doing soft pulls on you all the time, so a soft pull [00:28:00] where no real inquiry, they’re just analyzing credit on people that they know, and if it meets their criteria, they can make you a firm offer of credit. So there is an old wive’s tale out there that if you use opt out pre-screen, just Google opt out pre-screen, you can opt out of that where no one can send you pre-selected offers of credit.
There was a belief that that would boost your score three to five points. From everything that I’ve read, that is not true. But there’s nothing bad about that. It’ll keep you from getting trigger leads. If you apply for a mortgage, your phone’s not gonna ring with 50 different lenders. It’s gonna keep you from getting all those credit card offers showing up in your inbox. So not a bad thing to do, but it’s not gonna boost your credit score.
[00:28:41] Jeb Smith, Huntington Beach Realtor: I’m not gonna do it. I like I feel important when they send you those in the mail, say, I’m approved for a million dollars, I’m like, yes, and then I’ll do anything with it.
But hey, it feels good. No in all reality so we’ve talked about how to boost your credit score if you actually have credit, but what did the case that if you don’t have a credit. I’m looking to apply for a mortgage or I’m a foreign national or whatever it is. I’ve come here and I’ve been told not to get credit and just, I don’t have any.
So what can I do if I’m in that situation to put myself in a position to be able to have credit and turn, buy a house?
[00:29:11] Josh Lewis, California Mortgage Broker: Fannie Mae and Freddie Mac don’t have a requirement that you have a credit score. Nearly every investor that I’m aware of requires a credit score. We’ve talked about Dave Ramsey a lot in this episode.
Dave says it’s not worth it. You’re better off not using credit and not having a score. I have a lender that will do these. Any lender that does them is going to charge a premium. You wanna have a credit score. We’ve talked about using credit minimally while maximizing that credit score. If you do not have a score, it is much better to attempt to get a score in a relatively brief period of time than to get a loan without a score.
So there’s a couple of ways, Jeb, that we can do that. Authorized user accounts, if you have a spouse, a parent, They can add you as an authorized user on a car that has a longer payment history. This will work for most loan programs. It won’t work for all programs. Some are going to look, and when I say some primarily jumbo loans, which if you don’t have a credit [00:30:00] score, you’re probably not looking for a jumbo loan.
But jumbo lenders are gonna look at that and if you only have authorized user accounts, They’re gonna go, well, we don’t really have a credit history here. So the other thing that we want to do in that situation is get you secured credit cards. So with a secured credit card, they’re not really loaning you money, you’re putting money in an account with them, and that is your credit line.
You put $300 on deposit and you can charge up to $300 a month and pay it off like a normal credit card. But there are companies that specialize in this. They’re not the best credit cards. They may be the most expensive, but rather than having a monthly billing cycle, they report weekly. So, if you get that card and it opens today and you go pay your cell bill next week, they’re gonna report a history there.
So it’s building a history more quickly. So, depending on whether you have no history in your credit file or you have some, and you haven’t used it recently, the authorized user, the secured cards can help you build a score rather quickly, and you are much better off having a score than trying to go to one of the lenders that will make a mortgage loan to you without a credit score.
[00:31:05] Jeb Smith, Huntington Beach Realtor: Good stuff. So a lot of information provided between two episodes and I should have mentioned this earlier, if you didn’t hear episode one. I would go back and listen to that too. Providing a lot of information on credit to start with. And then we talked about how to improve the score. So you kind of need both shows in order to maximize credit. And ultimately, this is what we’re talking about this because credit is such an important piece of buying a home and effectively getting a better interest rate and a lower monthly payment. So be to be sure to check that out.
And while you’re doing it, if you’ve found any value today, rate us, review us on whatever podcast platform you listen to and be sure to tune in next week where we talk about how to actually get a mortgage if you’re buying a home.
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