How To Fix A BAD Credit Score ASAP
hey Kyle here with winth Housey love.com in this video we're talking about how to build credit to buy a house I'm going to show you the minimum credit requirements for each different kind of loan the five main components of a credit score so you can build yours quicker and then a simulator to help you take out the guesswork of increasing your credit score so first of all let's talk about why why in the world would you want to increase your credit score first of all credit unfortunately is really mysterious it's this number and all these different algorithms uh that create a score that A lender going to use to see if we can get a loan or not and also things like our interest rate and the costs and how easy the process is and so the higher our credit score is the easier it is to move through that process and get a home or more specifically get a loan and so one of the main reasons why we want to do this is we want to get approved easier no one wants to go through the home buying process and it be really frustrating and time consuming and a lot of stress so by having a higher credit score it allow ows us to qualify for better loans that can help us win a bid when we're putting in an offer for a home so for instance if you have something like a conventional loan that usually has a higher likelihood of getting accepted by a seller than something like an FHA loan so a lower credit score might not qualify for a conventional loan meaning that you might need an FHA loan which could be more difficult to get the home that you want also you can get a higher loan amount with a higher credit score the higher your credit credit score is the less uh risky you are um in paying back that loan to the lender and so they're more willing to give you a higher loan amount the higher your credit score is and of course that's if needed never just get a high loan amount just because you had a high credit score and because you can only get a loan that is comfortable for you with a monthly payment and it fits in with your short and long-term goals as well also when you're able to get approved for things like conventional loans with a higher credit score then there's less hassle less pay for work less stress if you have a lower credit score then often there's more documents that are required and can be a more stressful process to go through which nobody wants at all so another reason why you want to build up your credit score is to get better terms now most people are familiar with getting a lower interest rate if you have a higher credit score so for example let's run through a scenario here where uh let's say you had we're comparing two options and I'm using uh the software that I made called the loan Clarity advisor that helps you compare different loans side by side let's say we were looking at comparing a 720 credit score versus a 680 uh 3% down on a conventional loan on a $400,000 home um so likely what we would get is a 5.625% rate on this 720 credit score loan if we had just a 680 that could go up to 6.25% interest rate okay so if we scroll down here and we take a look even over a period of 10 years having a 720 credit score will save us $24,000 and we can look through even over five years that would save us $112,000 just by having a credit score that is 40 points higher and so that's why it's so important that we work on figure out what is the best credit score that we can get when we apply for a mortgage also uh you can get lower mortgage insurance so if you're on a conventional loan conventional loans have PMI private mortgage insurance that you pay monthly if you have less than 20% down so the higher credit score you have the lower PMI rate that you'll get also you can expect lower costs in fees um and you can shop this around with different lenders as well all of these things the rate PMI cost and fees when you talk with different lenders you'll get to see different rates mortgage insurance and fees and you can find which one works best again I have the loan Clarity adviser the link is in the description if you want to check that out that can help you compare loan estimates side by side or compare mortgage quotes side by side so you can make the best decision moving forward and if you do want to talk with a lender who's helpful who makes actually educational videos just like I do I've partnered with find my way home and you can click the link in the description to get connected with a helpful loan officer who can guide you through all of this so why did lenders care about your credit score uh they care about your credit score because unfortunately this is one of the biggest factors in getting approved for alone this is uh you know I say it's unfortunate because it's I it's just just so simplistic um it kind of is a little like reductive about a person you know boiling your entire payment history down into like one number but what it's doing is this one number is supposed to represent the likelihood that you're going to pay back a loan okay and so you're going to have three credit scores you're going to have Equifax experion and Transunion okay and the lender is going to look at all three when they do a credit poll and they are going to take your middle score or your median score so for instance 621 is the lowest so they'll throw that out the highest is 648 they'll throw that out and they will use the 634 as the score to get you approv for the loan and also to find what your uh rate is going to be your mortgage insurance and things like that now often people are curious about which scoring model uh lenders use and for Equifax it's FICO score five um for experion it's FICO score two and for TransUnion it's FICO score 4 okay so this 634 is going to be the risk score used on the loan and so this is going to be for the approval the interest rate and the PMI so when we talk about the approval here I'll show you on the next slide uh how there are minimums for different loans different loans have different credit score minimums that you need to have uh to get that loan okay one quick note too is if if you're applying together lenders are going to use the lowest middle score they're going to find each of your middle scores if you're applying with a spouse or somebody else to find both of your middle scores and then use the lowest one there now another question that comes up with a lot of people is what's the difference between soft pull and a hard pull a soft pull does not affect your credit score and it doesn't show up on your credit report a hard pull does show up on your credit report and only impacts your score anywhere from zero to Five Points um and so what a hard P does is it's what a mortgage lender is going to need to pull to be able to actually get you an approval for a loan if a lender does not give you a hard pull if they only do a soft pull you really can't rely on that uh approval that they give you as much as if they give you a hard poll okay um I like to think of it kind of like a hard poll shows you the full detail of your credit score uh the soft PO is almost like if you threw a blanket over top of it you can see the outline and the sh ape but you can't really see the details and a hard poll is needed to get approved for a loan okay so don't be afraid of that um you do have a 45-day window to shop for loans and get multiple inquiries which I'll cover in in a slide upcoming um okay so here are some credit score minimums for different loans let's start here at the bottom at 500 this is the lowest that I've seen be able to get approved with different lenders so um what you can get with an 500 credit score anywhere from 500 to 579 is an FHA loan with 10% down 10% is the minimum on an FHA loan with a 500 credit score you can also get a USDA loan with manual underwriting which not every lender does and you can also get a VA loan as well now what's really important here is that lenders can set their own minimums these are the minimums set by the guidelines okay every lender can choose to say we know the guidelin says 500 is a minimum but we want to artificial raise it to 640 or whatever they want to so if you run into a lender that can't do this you can talk with multiple different lenders to find somebody who can this is just what the guidelines say okay if you need help you can send me an email um so then we go up to 580 if you have a 580 and above this is where FHA 3.5% down starts so we can get an FHA loan with 3 and half% down so far right now none of these are conventional loans so these are where some of those offers could be a little bit difficult to get accepted because sellers tend to prefer conventional loans especially in a seller's market okay when we get to a 620 this is the minimum for a conventional loan it doesn't mean you're going to be approved automatically but this is what the minimum is to be able to apply for a convential loan and also this is very common as a minimum for VA loans so the bare minimum is 500 on VA but a lot of lenders won't won't do VA unless you have a 620 credit score um that's one of those overlays that we commonly see 640 is another common overlay uh for most loans like FHA or VA and then also it allows you to get an automated underwriting approval with USDA which is basically a lot easier than a USDA manual loan okay so we can see here everything below 640 in my mind is really ideal for some credit work I think above 640 uh you know it's always great to have a higher credit score but I think 640 really is the Target to get to anything beneath this I think it's really beneficial to start looking into doing some credit work before you get under contract to buy a house okay up here when we get to 680 um rates start getting better at 680 and higher and then also this is often where the minimum credit requirement is for Jumbo loans and then 740 a lot of people don't really recog ize is actually the highest that's where the the scale kind of tops out you're not going to get any benefit by having 780 versus a 740 uh and no other benefit of having an 800 that's not going to get you any like bonus points uh every lender that I've seen tops out at 740 you're not going to get a better rate you're not going to get better mortgage insurance 740 is the highest okay so we don't need to be super overachieving 740 is like top of the scale um for these credit scores so let's go into the five parts of a credit score okay um now it's important to remember in here that when we talk about these components when you see that there are different scores there's like FICO there's Vantage and inside of those two there's tons of different types of scoring models they're all looking at these five different parts in uh different ways so they're giving each different scores uh different weights one looks at credit card payments differently than the other one does and so these are uh how the credit score work but the scoring models can change your score based on these factors okay so the different bureaus and different models can give different scores through these different parts of a credit score so I hope that makes sense I know it can be a little uh a little confusing okay so the first part is payment history this accounts for 35% of your credit score okay this is the biggest factor with your credit score um so things to consider here is paying on time and setting up automatic payments really missing a payment having a payment will derail your credit score so it's important to keep that in mind that a late payment can stay on your credit report for 7even years so something that you can do in here is correct errors or disputes um and the one of the best ways to do that is uh through the cfpp they have an article to help you with that or I have a link in the description for scoremaster and scoremaster can help you explore some of these uh credit errors that you may have on your credit report and actually take action uh with them and that's something that I actually did with the late payment that happened in 2016 um and got that taken care of with scoremaster so the second part of your credit score is the amount owed uh so this is your credit utilization it's often called This is 30% of your score this is basically how much credit have you taken out how much debt do you owe versus your credit limit right very common for people to you know maybe your credit card limit is$ 3,000 and you have $1,000 on that um so you have a utilization of $1,000 on a $3,000 credit card so same thing here we want to make sure that we correct errors with things like collection accounts but it's important don't just randomly pay off collection accounts um because you really want to strategize the way that you look at settlements or pay for deletions with these collection accounts and so you can do this through someone like a credit coach or um the cfpb has tons of great articles uh online that can help guide you through some of this a little bit the main reason we don't want to just randomly pay off collections is it actually can lower your credit score we want to explore if we're going to pay off collections either if they can delete the collection from our credit report or if they'll work on a settlement where we can pay less than the amount owed or get on a payment plan or something like that um also something that you can do here is get a credit card or a secured uh credit card um because if you increase the credit limit limit uh that you have access to it lowers your utilization so um you can have a really high credit score just by having a few credit cards and obviously we want to use these well we want to make sure that we keep our utilization low and there's a couple rules I'll talk about here in a second um but what I usually recommend for people is if they have multiple credit cards is select a use for each one so maybe you have a grass a gas credit card you have a groceries credit card uh you have an eating out credit card and then pay those off in full every single month okay you do not have to pay a diamond interest to have a good credit score you do not have to keep a balance on it to have a good credit score so with your utilization uh what's usually recommended is uh let the ideal is to stay below 10% utilization so if you have a credit card that has $33,000 um as a limit you want to stay below $300 or 10% of that limit um with each account that you have so you want to keep that below 10% if you're up really high the goal is let's get to 50 all right then after that let's get to 30 and then let's get down to 10 and below and keep it below 10% to help your score increase okay the more you hit those limits so if we get under 50 our credit score is going to increase if we get under 30% it's going to increase even more and we get under 10% it's going to increase even more so we want to keep that utilization low we can't keep maxing out credit cards or else our score is going to drop okay the other part is credit length all right and this one stops up a lot of first-time home buyers who uh just don't have a lot of credit history this is going to take up 15% of your credit score um so obviously the more the majority of your credit score comes from these first two but this takes up 15% and in here patience is key all right something you can look at doing is adding an authorized user somebody who has good credit history getting added to one of their credit cards um can help increase the average age uh of accounts that you have and often what can happen for people especially new uh first-time home buyers or people who are new to credit is they'll try to get approved for a loan but they don't have enough credit length and so often what can happen is you may need something like an FHA loan which is more forgiving on credit length than something like a conventional loan um conventional loans like to see more than two years of credit history whereas something like FHA is a little bit more forgiving but this also is where people uh struggle to go from maybe the low 700s up to the mid to high 700s or 800s is it really just comes down to credit length it's really difficult for somebody uh who is younger to have a very high credit score just because they may have you know all their utilization correct and their payment history is good but they just haven't had their credit long enough to be able to have a super high credit score also in here don't close revolving accounts so credit cards don't disclose credit cards your score will actually lower having those credit cards active even if you don't use them um is going to help increase or keep your score at where it's at um because the minute that you close it it reduces the average age of accounts in your credit history we absolutely do not want that so if you need to put on a small balance on your credit card and then paid off just to keep that card active so they don't automatically close it for you uh and then 10% makes up the credit mix so what different types of credit are you using do you have an auto loan a mortgage student loans credit card uh if you just have credit cards uh it's not as beneficial as if you have a mix of different varieties of credit so we can have things like revolving credit this is uh something like a credit card or an installment this would be something like a car loan revolving is where we can keep putting a balance on and paying it off balance on pay it off and in installment is where we have one big balance and we pay it off over time like a car loan so again you do not need to pay a diamond interest for a good credit score there is this myth and I used to believe this uh because this is what I was told in the beginning was that uh you have to keep a balance on your credit cards to have them actually show up as active on your credit report and this is not true your statement balance uh is going to be reported to you every month as long as there's a statement balance then you can pay off your credit card every single month uh and then you don't pay any interest and it gets reported to your credit report and that's going to increase your credit score uh credit reports do not factor in how much interest you paid you do not have to pay any interest uh on your credit cards to maintain a good credit score okay um something else that you can do with a credit mix is uh for instance I just bought a couch recently and they were like hey if you sign up uh on our payment plan uh we'll give you 10% off so my option was paid in cash or on their payment plan and get 10% off and so I was like okay if I get on your payment plan can I just pay it off on month one and still get the 10% discount and there's no penalty and they're like yep no penalty so great I think I paid like $7 in interest for that first month uh and so but what that did is that also added another uh installment uh line to my credit report to help increase my credit score um and then the utilization was low because I paid it off that first month and got a 10% discount on it as well so you could do things like that um to help add extra uh credit lines in your credit mix to help this part of your score here another thing that's really huge is getting your rent counted talk to your landlord about if they have this available as an option usually this is only available as an option with like larger um companies uh who have rental properties um but there's a lot of services online that you you can use to actually get your rent counted towards uh or on your credit report and then finally inquiries inquiries is the one that people are most afraid of and I think misunderstand a lot uh don't be afraid of mortgage inquiries okay in inquiry only impacts your score zero to Five Points all right if you're applying for credit do it all at once okay because you usually have a window of time applying for different things like an auto loan or a credit card you have a period of time where you can get multiple inquiries to shop around um so with a mortgage you actually have 45 days you can look this up on the cfb's website uh they're the regulatory body that oversees uh consumer uh financing so you have 45 day period to get unlimited mortgage inquiries and it will only count as one inquiry it's not that each time you talk with a lender and get your credit pulled your credit score is going to go down that is not true one inquiry over 45 days you have unlimited you can get unlimited inquiries and it will only count as one one inquiry will only change your score zero to Five Points what often happens is you have some of these like free credit reporting companies and they will say you got your credit pulled the sky is falling by the way here's our lenders that you should use they kind of use fear to show you where they want you to go um that's often what happens there really should not be a lot of fear around getting your credit pulled if you're looking at getting the best terms and shopping for a mortgage okay um and these fall off over time so they're going to lose their impact over a year again the impact is extremely low okay um please wait uh to buy your house and buy stuff after you close uh because your lender is going to know and they're going to check if you got new credit before you closed on your home so for instance you can't get under contract to close a home you're going to close next week but then you went out and you bought a car and then you put a ton of stuff on a credit card please do not do that just do it after you close on your home because your lender will have to uh count in the new payments that you have on those new debt and it could change your credit score to the point that you may not be able to qualify for the same terms as before now something that I often see uh people talk about is they say I went and I shopped for or I went I Got A Car and then they ran a ton of inquiries through a bunch of different places and my score tanked it's not because of the inquiries the reason the score dropped is because they bought a car they lowered their average age of accounts and they increased their credit utilization it wasn't the inquiry that changed their credit scores as much as the lower utilization because of the new car loan balance and the lower average age of accounts because they just added a new credit account that's the reason the score dropped okay so just keep that in mind please shop for a mortgage you are supposed to shop for a mortgage it will help you save a lot more money if you shop for a mortgage all right do not be afraid of inquiries and don't shop for a mortgage just because you're afraid of an inquiry it will not impact your score that much now this is all an educated guess when we look at all these five components of a credit score there's little things that we can do and we can try our best to increase them but it really alls a guess one of the best ways to actually figure out how to raise your credit score in the shortest amount of time possible is using something like a credit simulator and mortgage lenders often use credit simulators to help their clients uh walk through the process and figure out how much money do they need to raise their score by what amount of points and what amount of time it's difficult to do that on your own U but I partner with a company called scoremaster I use it to help boost my credit score and you can too I have a link in the description if you're interested in learning more about that or you can watch my interview uh with Kima from scoremaster
