September 17, 2021

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Jim’s Mortgage Corner | Real Estate


I emphasized in previous articles that your FICO score is the number one reason you qualify for a mortgage. Job stability, income, existing debt, etc. all affect your ability to qualify for a mortgage, but your FICO score has the biggest impact on your spending power.

Most lenders many years ago introduced a method called risk-based pricing that enables lenders to measure credit risk. Risk-based pricing takes into account many factors such as creditworthiness, credit history, employment status, and income to determine interest rates and your creditworthiness.

The easiest way to explain this is with an example. Please note that this is only an example and I am not quoting actual prices. Let’s take a purchase price of $ 300,000 and pay a 3.5% down payment on an FHA loan. With mortgage insurance, your loan amount would be $ 294,566. Based on your debt ratios (existing debt plus your new mortgage payment divided by your gross income), what if the maximum loan payment you can qualify for is $ 1,203 (using principal and interest only).

 If your FICO score is 700, your interest rate can be 2.75%, so on a 30 year loan your principal and interest payment would be $ 1,203, so you would qualify for a purchase price of $ 300,000.

 If your FICO score is 630, your interest rate could be 4.25%, so your principal and interest payment on a 30 year loan would be $ 1,449. Based on this amount, the maximum purchase price you would qualify for is $ 250,000!

Based on the two examples, the only item that changed was your FICO score. A difference of 70 points in your FICO score can make the difference between whether you qualify for a $ 300,000 home or a $ 250,000 home.

What Are The Best Ways To Maximize Your FICO Score? If you have late payments, collections, judgments etc or 3) the balances of your revolving debts (credit cards).

If you only have one or two credit cards, I recommend opening another credit card, debiting a small amount, and paying it out when you receive your first bill. If you already have three credit cards, the amount owed in your revolving accounts can represent up to 30% of your creditworthiness. The general rule is that your credit card balance should be 30% or less than the credit limit.

For every credit card with a balance over 80% of the credit limit, which is paid down to 30% of the credit limit, you can expect an increase of up to 20 points per card. For example, if you have four high balance credit cards and are paying each of them up to 30% or less than your credit limit, you may see a 60-80 point increase in your FICO score.

Payment history and the length of the payment history account for up to 50% of your creditworthiness. Here’s a little secret that most don’t know to help improve your score. If you have a credit card that you haven’t used in years and is still open, I recommend putting a small amount on the card. In most cases, this will improve your FICO score. Wait, did I just say that topping up a credit card can increase your score? Let me be clear. Let’s say you’ve had a credit card for eight years, but the last time you used it was three years ago. You currently have five years of payment history on this card. By topping up and paying off a small amount, the payment history is brought forward overnight as you have added three additional years of payment history.

Most importantly, do not close any existing accounts so that payment history will continue to have a positive impact on your FICO score.

Branch Manager, NmLS # 1721861

Cherry Creek Mortgage, LLC, NmLS 3001