The talented and wonderful Leslie Barrows (www.thebarrowsfirm.com) recently asked:
How can someone increase their credit score? I have a lot of clients that say they can't refinance because of their credit score.
[If you need to reach Leslie, call her at 817-481-1583 or email her at firstname.lastname@example.org.]
Good question….sounds like another blog in the making.
Most important thing – clients should not qualify or disqualify themselves from mortgage financing. i.e., do not try this at home. They should always check with me. They simply do not know how to do this…and I, as a financier, have to work at it and perform several tasks in the qualifying process. I also encourage attorneys to avoid pronouncements like “I’m sure any bank would be happy to have this loan,” or “she can’t afford the house,” or “$2,500/month should be plenty for her to get a loan.” You don’t have to be a rocket scientist to do loans. But, you do have to know the guidelines and do the math. Without access to the qualifying guidelines, it’s unhelpful to attempt this on one’s own.
Often, consumers will check their credit with various credit report outlets like creditkarma.com or freecreditreport.com. The actual “trade line” or account information might be accurate but – here’s the big dirty secret – the scoring models they use are bogus and useless because creditors and especially mortgage lenders do not use their scoring models.
The bad news is that, mostly, these other scoring models typically report higher scores. Applicants will often tell me “I just checked my credit score and it’s 780.” Then, I pull my credit report and it’s 680. There are dozens of scoring models out there and the only one that matters is the one that the creditor is using. After I have a general idea about my credit, I couldn’t care less if some company offers to “give” me my score. It doesn’t matter unless that company is extending credit at that time based on the score and scoring model they use. But, if Discover Card (for example) tells you your score each month because you have a special service with them, it tells you nothing about your mortgage qualifying.
Mortgage companies, nearly universally, use the same scoring model.
Now – how to increase the scores. There are three main ways.
First, Develop a positive pay history going forward that will gradually increase the score. The disadvantage is that this method takes time. But, it’s the most reliable way to increase scores – pay the bills on time. Each positive pay history or action that appears on the credit report will tend to increase scores while each negative reporting will definitely decrease scores.
Pertaining to divorce settlements, it is my observation that clients just might have time. Sometimes, the court will allow a time frame during which a party who is awarded the house has time to refinance its debt before listing for sale is ordered. The general rule of thumb is that most anyone can improve their credit in 2 years to the point of qualifying for a mortgage (all other qualifying features assumed).
Secondly, Professional Credit Repair. This is my least favorite and it’s definitely a “buyer beware” action. Credit repair companies cannot – by law – promise score increases. I refer some people to credit repair companies because the task is so gargantuan and the folks need counseling as much as repair. But, it does cost money – several hundreds of dollars usually because they want their customers on a multi-month plan wherein many items have to be addressed. I have several concerns about this strategy:
Often, credit repair companies will immediately put all accounts into “dispute” status. If the information really is wrong (and it usually is NOT wrong), then the dispute might be resolved to the borrower’s advantage. Otherwise, nothing much has been done except…. here’s the dirty little secret about “disputes:”
Before a mortgage loan is made, disputes have to be removed from the credit report. So, what’s the problem with that? A couple of problems.
-It takes time and effort to get the creditor to indeed remove the dispute from the account; but mostly,
-While the account is in dispute, it is disabled from affecting the credit scores. This means that if a negative item is put into “dispute” status, the credit scores may rise. But, the rise in scores is false and doesn’t really matter because the “dispute” status will have to be removed from the account before a loan is obtained anyway. This is why lenders require disputes to be removed from accounts in the first place.
There are no guarantees.
Score enhancement using this method can be temporary.
Third time's a charm - My favorite way is to develop an automated, professional “what if” scenario for my customers. Most repositories (the companies that lenders use to pull credit which receive information directly from the 3 major credit bureaus) have automated systems that offer a variety of options. The two main programs are
An enhancement model whereby we state an amount of money which the borrower has which can be applied to certain outstanding debts. The repository we use calls this the “Scoring Wizard.” (This works on the principle that lower balance:limit ratios create higher scores so that paying down a revolving debt below a certain threshold will trigger an immediate score enhancement). This method is very precise and tells us exactly what dollar amount to pay on what account. Sometimes, the system will tell us to move balances from one revolving account to another. The system knows. (Cue the Twilight Zone music).
The other method is similar but we enter information into specific trade lines on the report and ask “what if.” What if it’s paid down to this amount; or, what if this shows as a “paid collection,” etc. It even shows how long the score enhancement will take. Our repository calls this a “What If Simulator.”
The most expeditious, the wisest and the most effective way to increase one’s credit scores for the purposes of mortgage financing is
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Grapevine, TX 76051