Credit scores and mortgages

Discussion in 'General Discussion | Credit Cards' started by vardievard, Apr 17, 2013.  |  Print Topic

  1. vardievard

    vardievard Active Member

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    Situation: someone I know wants to apply for a mortgage in about 12-18 months. She has had a credit card in her name since high school, is an added user on most of her parents cards, and last year I had her get two more cards that helped with trips we went on, none of which have been closed or intend to be. No student loans or other debt.

    I'm trying to decide whether or not to convince her to get 2 more cards that would help us in future trips I'm planning and which also would just be kept open.

    I believe her current score is around 740-750. Do you think two more cards is a bad idea and would hurt on long run (mortgage wise)
     
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  2. miles and smiles
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    miles and smiles Gold Member

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    You will likely find answers to many of your questions in this thread from post #34 on:
    http://milepoint.com/forums/threads/credit-score-in-free-fall.56157/page-2
     
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  3. Mike Reed

    Mike Reed Gold Member

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    New cards will reduce her "average age" which could impact her score, but more important is the signal it sends to potential lenders - she's seeking additional credit AND a mortgage. Bad juju.

    What she REALLY needs is a lender that isn't score-based, but will do an actual full underwriting of the loan and uses credit score as one component. 740/750 (if that's her FICO) is a great score and she'll have no problem getting a mortgage.

    Remember that your mortgage (or rent) shouldn't exceed 25% of your take-home pay to be "affordable." And 15-year fixed with 20% down is the way to go - avoids PMI and pays off with less interest.
     
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  4. paladin87
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    paladin87 Silver Member

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    Personally, in the 12-18 month frame, I would not sweat it at all based on already solid credit, as long as she does not do anything stupid like pay late, etc. If/when I was looking for a mortgage, I would be concerned in the 3-6 month out frame, but not 1.5 years.
     
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  5. jeffrey930

    jeffrey930 Silver Member

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    I would not apply for any more credit card until I get the morthgage loan. I would rather make sure I get the best rate on a morthgage loan than apply for credit card that has a bonus of 40K or 50K worth about $500.
     
  6. TravelBear

    TravelBear Gold Member

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    I cannot see how 1 credit card 12 months ahead of a mortgage could be so detrimental. She has a good credit score, as long as she remains responsible with her credit she should be fine. She will see a drop initially but in 3-4 months her score should go back up and possibly be higher.

    So many of the churners are talking about getting 5-6 at a time then doing it again as soon as they can. THAT kind of behavior is major bad juju, as Mike put it.

    This is definitely a due diligence on her part, and something she needs to feel comfortable with. No one knows the answers for sure.
     
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  7. Mike Reed

    Mike Reed Gold Member

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    She's near 740. Dropping below 720 would be BAD.

    Sent from my iPhone using milepoint
     
  8. HaveMilesWillTravel
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    HaveMilesWillTravel Gold Member

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    Personally, I'd be very reluctant to make any recommendations to a friend in a case like this. If I knew for sure it would have a negative affect I would warn and provide resources to review, but I wouldn't do the opposite.
     
  9. jbcarioca
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    jbcarioca Gold Member

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    Agree,
    Mortgage lenders use different credit scoring criteria than do credit card lenders, so the scores are NOT equivalent. A credit score of >750 for a renter, (i.e. someone who does not own their primary residence) is pretty decent anyway. Preparing a year ahead the most important issue is not to change jobs, closely followed by not changing marital status, nor residence. In any event so long as you're planning on at least a 20% down payment you'll probably get a very good rate. The lower the down payment, longer the term, the higher the rate and the greater chance of rejection.

    Beyond those factors Loan to Value (LTV) is a very large factor, and is based on the lenders appraisal. Thus, for a first residence purchase buying a smaller house or unit in an area dominated by larger and more expensive ones usually is a leading indicator of a good LTV.

    Mortgages approvals are always based on the combination of borrower and collateral, not just one of them.
     
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  10. Traveling Momma

    Traveling Momma Silver Member

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    Funny enough my FICO score just increase from 740 to 756 after only two months after my first App-O-Rama of 4 cards on top of the 4 cards long-term cards I already had.

    However, I would not recommend doing a churn now before the poster applies for her mortgage. In this credit environment you need to demonstrate you are not a risk and that you do not need credit from credit cards to get by. The underwriter will assume you're using those lines of credit not just meeting the minimum spend and then waiting to churn again.
     
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  11. flightnurse

    flightnurse Silver Member

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    How so? I just refi my mortgage, my mid score was 720, and I locked in a very excellent rate of 3.45, I also got three new CC 6 months ago, I have $200 balances on them which was explained to me was better then not having a balance on them according to the underwriter who did my refi.
     
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  12. flightnurse

    flightnurse Silver Member

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    I just went through a refi, I also got new CC's 6 months ago, my mid-score was 720 and was able to lock in a excellent rate of 3.45. IF your friend is a 12-18 months out, she shouln't have a problem. Of course, she should have a plan on when she plans on doing the purchase. So for my experience, the new CC did not hurt me getting an excellent rate. OF course YMMV..... I'm just giving a recent data point.
     
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  13. Mike Reed

    Mike Reed Gold Member

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    Your mid was 720. Why take the chance here that this isn't her mid or highest that would drop below 720? If she wants a house, what small cc reward could possibly be worth the risk?

    Sent from my iPhone using milepoint
     
  14. TravelBear

    TravelBear Gold Member

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    Mike Reed, wasn't sure if you actually poo-poo'd my suggestion of 1 card 12 months prior. I certainly agree that an AOR of more than 3 cards should be considered risky. But I got the feeling you still felt like 1 would be too much. Did I read that wrong?

    Flightnurse, I wonder if there is a difference since you were refinancing v. first time loan?

    We actually just started the refi process and locked in at the same rate as flightnurse. I did get 3 cc last year and my mid score was 784.
     
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  15. Mike Reed

    Mike Reed Gold Member

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    It's about priorities. Is the priority another credit card or a house?

    Without a full financial picture (debt to income, available credit, etc.) it's hard to make an assessment.

    Overall, though, I wouldn't recommend making any changes other than paying down existing debt and/or saving for a down payment at this point.

    Sent from my iPhone using milepoint
     
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  16. jbcarioca
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    jbcarioca Gold Member

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    A refi is dramatically different than is a new application. In a refi actual performance on the existing mortgage trumps most other modest negatives. In a new mortgage a typical bureau score of 720 will probably get an approval but is unlikely to get the best pricing. In most cases the people discussing a mortgage loan application do not themselves know all the criteria employed to approve and price a deal, although they usually have good clues. They all will know a super prime and they'll all know a "get 'em done", but few will know the in-betweens. Anybody who has at least three good trade reports from credit cards plus a car loan/lease and a store card or two in a file at least three years old probably ca get a decent deal. Opening new accounts in such situation never helps and may hurt.

    In a situation such as that of TravelBear it is obvious that there is a fairly thick, long, well disciplined credit file. In that situation a new account or two or closing one or two will not make much impact, because the mass of good history outweighs swing factors. The questionable ones are thin (few accounts) short (less than five years), unstable (changing jobs and or moving and or changing marital status) files. Those need stability and need to avoid new credit unless there is a clear reason.

    Other things remaining equal anything that looks like churning will be a large negative. Only long, stable histories avoid negative consequences from churning. BTW, changing specific card accounts from the same issuer does not usually count as churning. However, as always, YMMV. A client with which i am working at the moment, a very large US issuer, actually prefers people to periodically change plastics within their portfolio, so long as the total credit available does not change materially. They think they get more activity that way without negative credit consequences. Their own data support their argument.
     
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  17. TravelBear

    TravelBear Gold Member

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    Thanks! I knew someone here could shed more light.
     
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  18. Sweet Willie
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    Sweet Willie Gold Member

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    are you getting card(s) or is your friend the sole workhorse ?
     
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  19. flightnurse

    flightnurse Silver Member

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    Mike, 1 or 2 cards wont hurt her since she is looking at a year or 18 months from now, her credit score will have rebound by then and have history with those cards. According to the OP her score is in the mid 700s. After my refi, I am more educated on how the credit score game works then before.
     
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  20. flightnurse

    flightnurse Silver Member

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    Tbear you bring up a good question, refi v first time buyer. This current house is/was my first house, mid score was 690, and was able to get a good rate (not excellent) of 4.25. Since I had never bought a house before wasn't too sure what they (underwriting) was looking for. However, my income was/is high enough to allow the purchase to go through. length of employement (how long have you been in the type of work) and lenght of current employor matters too.
     
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  21. Mike Reed

    Mike Reed Gold Member

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    And yet nobody seems to want to articulate the risk vs the reward. The risk is that the borrower either has too much available credit and one or more of their cards lowers the limit, or they use it and increase their debt to income ratio.

    For what, compared to knowing that by maintaining things as they are, things only get better? What's to gain vs what's to lose?

    Sent from my iPhone using milepoint
     
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  22. jbcarioca
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    jbcarioca Gold Member

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    Well said. There are a good many moving factors: down payment, appraisal, purchase price, tenor (contractual maturity),fixed vs variable, basis for variable, prepayment penalties, other relationship with lender, income, other debt, stability (residence, job, marital status), presence of lawsuits, other public records (driving history), insurance claims, other assets...
    Depending on all those factors no two deals are necessarily equal. don't believe anybody who says it is simple.

    The credit scores you can see are known as "bureau scores" and are invariably NOT scores used for a lending decision. Those packaged scores are sometimes the basis for securitization packaging, so they do matter, but not very much. Further a mortgage score is not the same as a a credit card one nor a car loan one, and large lenders have as many as a dozen different scores used for different components of their decisions. Some of the large issuer mentioned frequently here have hundreds of different scores depending on how the deal is originated. That is not to mention response scores, activation scores, behavior scores, POD, LGD and other strange acronyms.

    Don't let yourself be deceived that one credit card or a balance on one card or not will make a big difference to a decision you want to make more than one year hence. It will not.

    DO know that any late payments, disputes, public judgements, litigation, job changes, address changes WILL make a difference. Changing primary banks often bears influence too, especially if you're intending to apply with the bank. If you want to apply at, say, Wells, Fargo in a couple of years concentrate your payroll and other deposit accounts with them and never run an overdraft, but make regular savings deposits. If you're going through a mortgage broker that will be less important, but still is a factor.

    Sorry for shouting. It is frustrating to see bad advice on issues that are usually quite based on common sense. In the long run this system is very difficult to game, and usually attempting to do so ends in tears.

    These are my opinions. This is a public BB so you have no idea whether I or anyone else has a clue. Most bloggers are paid for credit card referrals so their interests are not hard to discern. Once again YMMV.
     
  23. maksim

    maksim Silver Member

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    Keep in mind.... The score is just one factor.

    Your score may rebound by then.... However the extra hard inquiries will still be on there.

    Mortgage app, car loan , student loan hits are ok....
    Credit card hard inquiries...... Are not and will stay on the report for 2 years.
     
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  24. jbcarioca
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    jbcarioca Gold Member

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    They stay, but almost all scorecards consider only inquiries made within the last 180 days prior to the application. Just because something is in a credit bureau report dies not mean it will be used for scoring. Especially in mortgages score is rarely the determining factor for approval, but it IRS affect pricing. The deal can even outweigh a poor credit history, with, say, a 50% down and good LTV almost anyone can get a mortgage.
     
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  25. vardievard

    vardievard Active Member

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    Guys, thank you so much for the responses. As of now almost certainly not recommending new applications for her. "Risk vs reward" is really what's making the decision. We can live without one extra trip but cannot imagine being ok with the possibility of my recent decision ruining our mortgage and long term plans..
     
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