Using Secured Credit Cards To Increase Scores For Mortgage
This blog will discuss getting and using secured credit cards to boost your credit scores to qualify for a mortgage. Getting secured is the fastest and easiest way for mortgage borrowers to qualify for a mortgage. Many consumers with an extenuating financial event such as bankruptcy or foreclosure often do not want to get into another situation where they spend more than they earn.
Secured credit cards are a good choice for consumers who don’t have an established credit history. Financial institutions are far less likely to approve such consumers for a traditional credit card.
People with financial issues such as prior bankruptcy, foreclosure, business shutdown, bad debt, and recovery avoid getting new credit and want to pay for everything with cash. Nothing is wrong with this, but it will not help them re-establish credit and will help them when they apply for a home loan or other credit.
How Secured Credit Cards Help You Get Approved For a Mortgage
Even though they do not plan on using credit, they should get secured credit cards to raise credit scores and re-establish their credit.
Homebuyers planning to qualify for a mortgage loan must realize that lenders have minimum credit score requirements. Lenders also want to see seasoned, established credit tradelines.
How Are Mortgage Rates Priced?
Mortgage rates are priced based on layered risks lenders take. The higher the layered risk, the higher the rate. There are many factors mortgage rates are based on. The biggest factor determining rates is borrowers’ credit scores. Lenders have pricing adjustments based on borrowers’ credit scores. Pricing Adjustments are when lenders hit a borrower due to a certain credit score. In this section, we will discuss pricing adjustments on mortgage rates.
What Are Loan Level Pricing Adjustments?
To get the best preferred lowest mortgage rates on a 3.5% down payment FHA loan, borrowers need a 720 credit score. Pricing adjustments are based on layered risks such as credit score.
There are tiered layered risk LLPA on the cutoff credit score breakdowns of 700 to 719, 680 to 699, 660 to 679, 640 to 659, or 620 to 639 FICO. There may be large pricing adjustments for borrowers under 620 credit scores. Lenders view lower credit scores as higher risk. With higher risk, lenders charge higher mortgage rates.
Credit Scores Versus Down Payment & DTI on FHA Loans
With FHA loans, Borrowers with under 580 credit scores require a higher down payment than borrowers with higher than 580 scores.
HUD, the parent of the Federal Housing Administration, allows borrowers with credit scores down to 500 FICO qualify for an FHA loan with a 10% down payment.
Credit scores also have an impact on debt-to-income ratio requirements with FHA loans. For example, borrowers with credit scores below 580 FICO need a 10% down payment for an FHA-insured mortgage loan. There are also reduced debt-to-income ratio requirements for borrowers under 620 credit scores with FHA loans.
What Is The Lowest Score I Can Have To Get an FHA Loan?
For borrowers with credit scores between 500 and 580, the minimum down payment required is a 10% down payment on FHA loans. FHA borrowers with only a 3.5% down payment need a credit score of at least 580 FICO.
HUD, the parent of FHA, allows borrowers with credit scores down to 500 FICO to qualify for FHA loans. However, if you have under 580 credit scores and down to 500, you need to put a 10% versus a 3.5% down payment on an FHA home purchase loan.
With a FICO credit score of 580 and 620, the maximum back-end debt-to-income ratio cannot be greater than 43%. For borrowers with higher than 620 credit scores, the front-end DTI cap is 46.9%, and a back-end DTI is capped at 56.9% to get an approve/eligible per Automated Underwriting System (AUS).
Using Secured Credit Cards To Raise Credit Scores
Homebuyers who do not have a 10% down payment and only have a 3.5% down payment on a home purchase would need a minimum of 580 credit scores on FHA loans. Borrowers with a credit score of 577 FICO but do not have the 10% down payment towards a home purchase would need a minimum credit score of 580 FICO.
The 580 mark is the minimum credit score needed to qualify for a 3.5% down payment FHA loan. With credit scores under 620, the maximum back-end debt-to-income ratio allowed is 43% DTI to get an approve/eligible per AUS FINDINGS.
If the home buyer has a debt-to-income ratio of 56.9%, the minimum credit score required is 620 FICO to get approve/eligible per AUS FINDINGS.
Paying Down Credit Card Balances To Boost Scores For Mortgage
There are ways of raising credit scores to qualify for a mortgage. Credit Scores can fluctuate greatly from month to month consumers max out credit cards, which can plummet credit scores. However, their credit scores will skyrocket if they pay down their credit card balances to 10% of the credit limit. The fastest and easiest way to boost credit scores is by getting secured credit cards for those with few or no revolving credit accounts.
Each secured credit card can boost credit scores by at least 20 points. Depending on the credit profile, consumers can easily boost credit scores by 60 or more points by getting three secured credit cards.
Most mortgage loan originators recommend borrowers needing credit score improvements to get secured credit cards. Borrowers needing credit advice or to qualify with a lender with no overlays, don’t hesitate to contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays.
