How Mortgage Lenders Look At Your Credit
https://www.youtube.com/watch?v=R55QlDYMTuA&t=1s
Welcome back! Today, we're going to be talking about credit. So, I think people are overthinking credit. As a mortgage lender in 48 states, all I do is talk to people all day long. You know, I have a calendar that's open. I say this all the time, but guys, get on the calendar if you have questions. And I look at a lot of the questions, and a lot of them are super hyperfocused on credit. Which FICO do you use? What time do you pull? Is the moon aligned? It's too much. It's too much.
So, I'm going to tell you guys the fundamentals right now of what a lender is looking for. It's really simple. Really simple. Pay your bills on time, guys. That's it. Pay your bills on time. And if someone's like, "Oh well, I didn't in the past, but I am now," great! You are one step closer. With credit, that is what we're looking at. We're looking at one to two years, really is what I'm looking at with a microscope, to make sure you've been paying your bills within the last two years. There's no magic equation that's going to erase if you haven't been paying your bills in the last two years, you know.
Uh, one of our clients showed me this website. He's like, "Oh, check this out. It's like they're selling authorized users. You can be an authorized user on a stranger's account that has good credit to build your credit." What? Like, stop with the shenanigans. Just stop. It's really, really simple.
So, let's pretend you have no credit. Should you start off by being an authorized user on a stranger's account? No. Should you get on like a friend's account or your mom's or someone else who doesn't have good credit? No. If your parents have great credit and pay off their bills every month and they want you to be an authorized user, okay. But most people don't have that. So, what should you do? Start with like a basic credit card. If you go onto NerdWallet and you put in no credit, they'll have suggestions for your first card. If you're brand new, fresh, you shouldn't have to get a secured credit card. Usually, Discover has a starter card. You're going to put one tank of gas on it, you're going to pay it off every month, you're going to do that for 6 months to a year, and then you're going to open up a second card and do the same thing. You're going to set up autopay, like 10 days before your bill is due, so that it is always paid, but you are also going to check every month to make sure the auto pay works. Okay? It's that easy. Seriously.
I've seen so many forums recently where they've made it this incredibly complicated situation, and it's just not. Okay, now look, that's if you have no credit. That is how I would say start your credit. Don't buy a car. A lot of people go, "Oh well, you need to have a car to get a... No, you don't. You don't need to have a car to get a house. Do not get a car loan." Because what I see more and more is these crazy thousand-dollar payments. Yeah, payments. It's more than they qualify for a house. So, don't get a car.
And then sometimes people go, "Oh well, I heard you have to see a variety of trade lines. So, I have four Visa cards, a Macy's card, a Kohl's card, a Target card." No, no. Stop. Stop the madness. Do you guys remember that from the '90s? If you're old like me. Susan Powter, anyways. You don't need store cards. We're not looking for store cards. We're literally looking for just one or two credit cards that you have responsibly managed. That is what credit is for. You don't need to show us that you charge a bunch and then you pay it off. You don't have to show that you have revolving and installment. Literally, you could qualify for a house with two cards, even one card, and over a one-year credit history.
Now look, there's some lenders that will go, "Oh well, you can do it quicker if you do an authorized user, you do this and that." Guys, let's just keep this simple, right? If you have to invest one year in your credit to buy a house where everything you did was on you and you did a great job, isn't it worth it? Instead of trying to do one of these weird ways where like maybe they'll realize it's an authorized user, maybe they won't. CU, like Underwriters do pay attention to that. So, if your credit's all authorized user, there's certain loans where you won't qualify because of it. So, really be careful about that.
Now let's say you don't have good credit, right? We've all been there, guys. I've been there. I know the pain, okay. You got to clean it up. It's that simple. There's no magic. You know, the debt cons, the debt renegotiation. Oh my God, I did that in my 20s, worst mistake. Worst mistake. Debt renegotiation is a scam. It will screw up your credit for a long time. Do not do it. You know, uh, we do have a credit expert that we recommend. We do not take a cut or anything like that. But if you have a bunch of collections, really complicated credit history, you know, there's some people that are like, "Just pay it all off." That's not always the right move because a lot of this stuff has time periods.
If you have bad credit, and when I say bad, I don't mean 680, I mean like 550 and below, okay? 550 or below, generally, something traumatic has happened. Now, you want to talk to a credit expert to start cleaning that up. But then, in fairness, like, you could be at a 550 because you have a medical collection from 3 years ago, and that's all that's on there. Something like that, a little bit easier. You would start with a secured credit card that reports, and then you'd move to a normal credit card. Okay? There's very simple ways to get you guys where you want to be.
So, this video isn't to yell at you, although I think I've been a little yelly. It's just, I see so much madness right now with everyone making it so much more complicated than it is. You know, you can have a 740 credit score, but if you haven't been paying your bills and we're seeing that credit score go down, it's just as bad as if you have a 550. Okay? The most important thing is that you're paying your bills on time for the last two years. You need a good explanation for the past, but if we can show you're properly using credit for the last two years, you're generally going to be in a pretty good position. Okay?
Now, what are some other things to watch out for? Don't max out, right? And I know that's easier said than done. Most of the time, people are already maxed out on their credit cards, and they still are going, "Oh, I need to get that sweater. I'm going to go get another credit card." Knock it off. You know, go check out Dave Ramsey Baby Steps if you're looking at your credit. Write down every single credit card you have. Write down the limit. If you are near the limit on all of those cards, you are maxed out, and it's time for you to go do Dave Ramsey Baby Steps or something like that. Okay? It is not time to open up another credit card.
There is not a magical thing that's going to get you out of this. You're going to have to put in the hard work, you're going to have to rice and beans it, and you're going to have to pay it down. Okay? Now, if your credit cards are near the limit, does that mean you can't get a house? No. If you still qualify for the house, even if your credit cards are maxed out, if your score is within range, you're fine. Okay?
So, there's a lot to this, but the bottom line is this: It's not as complicated as some of these forums are making it. You know, and I've talked to some people where they're like, they've got great credit. They're like, "It is 770," and they're like, "I just want to get to 800 before I apply for a house." It's not going to change their rate. It's not going to change whether or not we approve them. It's just, they have, because this forum told them 800's better, that they have to hit this goal that actually doesn't change the terms or the rates at all. You know, that's what you want to watch out for. Is it becoming a quest for perfection that's just going to basically push you out of the market forever? Okay?
Something to be really cognizant about as well, don't be ashamed of your credit, ever. Credit's just a reflection of where our life has been. And let me be blunt, you know, some people are very blessed; they're raised with a family that teaches them about credit, or they learn about credit at an early age, and they never have any drama. And for them, it can be really hard to understand how other people can have drama. I get it. You get raised with, you know, no one tells you anything, or your parents have bad spending habits, right? Where they max everything out, and then you maybe go to school, or you get your first job. And here's the thing, when you turn 18, every creditor in America, my goodness, they want to give you money. Yes, they do. You know why? 'Cause they want to get you in debt. That's right.
I remember going to UC Santa Barbara, that's where I went to school, and they had all these booths. "Here's a credit card, here's a credit card, here's a credit card." As an 18-year-old girl, I thought it was Christmas. I was an idiot, but it's okay, it's part of life, and a lot of us have been there. So, don't be ashamed, you just have to get on the path back.
So, if you're looking at these forms or chat things where they're just making it overly complicated and unattainable, it's not. You just need a plan. So, I hope this video was helpful. One more thing to tell you guys, when you're not, like, if you're not thinking of applying for a house in the next 6 months, freeze your credit, please. Just, your credit should be frozen at all time if you're trying to build it, and you have to open up like two cards, fine, freeze it right afterwards. Your credit shouldn't be open at any time. And the reason I say that is because hackers are really talented. They can crack in, steal your identity, screw up your credit, and that will haunt you for a long time. You have to file a police report; it's a whole thing. I know people who've had their credit compromised; it's a living nightmare. So, freeze your credit, guys, and you know, don't get psyched out by the forms. Thanks for watching.
How To Prepare Your Credit Score To Buy A Home (2021)
https://www.youtube.com/watch?v=-cWaYzRXVX0
How to prepare your credit for buying a house. So today, I'm going to cover the three big keys of credit and what to do in order to make sure that when I, the lender, pull your credit, you're putting your best foot forward. Okay, number one: on-time payments. Are you paying your bills on time? I can't stress it enough. It is one of the biggest indicators, and from an underwriting perspective, you know, it doesn't matter if you make half a million dollars a year. If my underwriter looks at your credit report and every single month you're late, that doesn't make us feel good because it tells us you don't know how to manage money, which makes us worried you're not going to be able to pay your mortgage. So paying on time is critical.
And also, like, I've had circumstances where people may have missed a payment, or the payment's late, and the big question that we always ask next is, why? Why did you miss that payment? And if you say, "Oh well, I just forgot," okay, well, how did you resolve the fact that you forgot? If you're like, "Well, I forgot, so I made sure I put myself on autopay, it will never happen again," okay, great. If you say, "Well, we wanted to go on a vacation, so we couldn't really afford to pay it that month, but we paid it the next month," no, no, no, no, no. So, you need to think about all of these late payments as an underwriter asking why.
Now look, sometimes people go, "Oh god, I have late payments, I can't buy a house." No, we just need a good reason why. You know, if your payments were late, let's say in 2020 for a couple of months because of COVID, and you didn't get the assistance quick enough, that's a good reason. If your score's fine and the computer likes you, and that's your reason for the lates, great, that's fine. You know, what we're looking for is, are you responsible? Are you responsible now? And generally, we're not necessarily going to ask about late payments unless the computer's calling it out or if it's within the last 12 months. That's when I generally see underwriters asking about why was that payment late.
Okay, now the other thing to keep in mind with late payments, and I've done videos on this before, guys, if you get a bill from something, pay it. If you think it's wrong, pay it, and then argue it. And I know that you guys are like, "Oh my money, you're wasting my money, Jennifer, trust." But here's the thing, I have sat in this chair long enough to see people destroy their credit over the stupidest stuff, and it's like, "Well, I didn't want to pay that twenty dollars." Okay, you should have just paid it, and then fought with them because if you had paid it, right, we wouldn't have 50 late, and then if you fought them and you won, you would get your money back, and your credit wouldn't be destroyed. But if you didn't pay it and then you fought them, the odds of them removing those lates are zero.
And a lot of times, you know, people don't understand when they need to actually pay stuff, which I know sounds crazy, but like, I cross it all the time. Here's the thing, if you're, let's say, you have a credit card, it has a 500 balance, and you're like, "I'm paying it off," do not write that check for 500. You write that check for 550. Yeah, write it for more. And the reason is that interest is accruing from the time that bill is put together to when your payment gets there. So, if it says you owe 500 and you pay 500, that's really not all you owe because there's that chunk of interest. So, if you're trying to pay something off, always pay over what the balance says. I cannot stress that enough. I've seen so many people throw away bills because it's a dollar, 50 cents, they think they're joking, and their credit gets destroyed, and you have no recourse because it's 100% your fault. I know it's horrible.
Okay, so no late payments. Let's stay away from those. If we have a late payment, let's either a) solve the problem if it was you forgetting, or b) have a good reason.
Okay, next, debt utilization. Debt utilization is really, really important, and it depends on how much debt you have. So, you can actually have a situation where someone makes half a million dollars a year, they have three credit cards, they pay them off every single month, but their credit's low, and you're like, "Whoa, what's going on?" Well, my guess would be it's one of those situations where, let's say, they have a Target card, a Macy's card, and a Kohl's card, and they all have very low limits. So, whenever they use the card, it looks like they're maxing it out. Yes, another way this hits is with American Express. So, with American Express, they don't, a lot of the cards don't have limits, but the way the credit bureaus read the limits are, it doesn't go, "Oh no limit," it goes, "Shoot, I gotta figure out what the utilization is if available, what's the most they've ever charged on this card?" So, if you charge seven thousand dollars on that card every single month, and when I pull your credit, you're at seven thousand dollars, it looks like you're maxing out your card.
You know, and that's another thing with people who, you know, and I'm one of them, so I use my credit cards for everything. I use it for the security feature, you know, and that's something important to note. If you're using your debit card for everything, you are putting yourself in harm's way. And even though your bank will protect you to some limit, like, here's the thing, let's say you have ten thousand dollars in your bank account, a hacker gets in, wipes you out, how are you paying your mortgage while your bank works it out? It's usually not 24 hours. So then you've got this whole host of trickle horrible things, whereas if you put that same charge, let's say it's a two-dollar eBay charge, on your credit card, you know, they would be dealing with that, you could still pay your mortgage. So, please guys, like, your debit card should be locked in, in like a safe. Seriously, I would not use it in a million years, maybe to take out cash, but that's it.
Um, so there's a lot of people that do use their credit cards for that reason, also for points. We all love points, don't you? I like free stuff, do you like free stuff? I love free stuff. And if you pay off your credit card every month, it's free to me, uh, not to the vendors who have to pay the fees. Anyways, so when I'm buying a house, since I'm one of those people, I pay off my credit card every single week before I have them run my credit. So, for instance, I was actually looking at a house, and I was like, I, I wouldn't let the lender pull my credit. I can't do my own loan, I know it's a good thing, you're not supposed to, but anyways, I, I wouldn't let them pull it. I'm like, "No, you got to wait till the second." And they're like, "Why?" And I'm like, "Well, because, you know, I want to make sure everything's paid off, so it's super clean." Right now, if you pulled it, you know, it's going to take days to report because when a lender pulls your credit, it's not instant to that minute, and it doesn't, the whole paid off every month reflects, but not in the way you'd expect.
So, if for instance, let's say you have a ten thousand dollar Capital One card, and you spend seven thousand a month on it, because maybe your rent's on it too, and you paid off at the end of the month, well, if I pull credit, and that hasn't reflected of being paid off yet, it's going to look like you're maxing out your credit, your score is going to be a lot lower. I've done it with myself where I haven't, you know, done the whole paid off every week thing, and my credit score literally can be 100 points different. 100 points different. It's a big deal.
Debt utilization is huge, and sometimes people are like, "I don't know why you're saying I can't get a mortgage. I pay my bills on time, all the time." And it's like, your every single credit card you have is at the limit. Like, that scares underwriters for sure. And then, if you're in a situation, let's say your payment's going from 1,000 to 2,000 a month, which is a huge jump, and they look at your credit report and you've got nine credit cards all at their limit, you look maxed out. How are you going to get to that 2000? So, you really want to think about that.
And a general credit card rule, guys, like, just don't buy it if you can't pay it off the same month. I know that sounds so easy, and I know how hard it is. Like, it took me years of discipline to get to the point where I was like, "If I can't pay it off, I can't buy it." But you really need that mindset because credit cards are a trap. You know, if you watch Dave Ramsey or anyone else, they are the devil. Credit cards are the devil unless you know how to handle the devil, which is, you don't let them win. So taking out debt when you can't afford to pay it off is a terrible idea.
So that's another one. And then the third one, so we covered payments, utilization, inquiries, and lines of new credit, and closing accounts, all of that comes into play. So, if I was gonna buy a house and I knew six months, a year in advance, I would not open up any new lines of credit. A lot of people think, "Well, if I get another credit card, then my score should go up." There's very few circumstances where that is true. Um, I see where people get new credit cards, and it causes more trouble. I've actually had it where people have good credit scores, like 700 plus, and they've opened up like three new credit cards in a couple of months. I can't get the computer to accept it, no, because it's seen as too much risk.
And sometimes what we'll see is, we'll see someone gets a raise, they buy a new car, they open a couple of new credit cards, then you come to get the mortgage, and we're running it through desktop underwriting, and it's going, "Whoa, no," because it's seeing this huge spike in available credit. So, you want to be really mindful of that increase.
Just don't let anyone pull your credit. Personally, my credit's always frozen except for when I unfreeze it for specific things. It's a really good safeguard. Like, I've been at that furniture store where they're offering you 10% if you get a credit card, and you're like, "Oh, you're doing the math, and you're like, 'This makes sense.'" It doesn't make sense. Don't do it. Just don't do it. You know, if you're like, "God, I just really like opening credit cards," please freeze your credit. It does take at least 10 minutes to unfreeze it, and that will make you really evaluate the decision you're about to make. And having little safeguards like that can be great.
Now, another mistake people make is they close all their accounts, or they go, "I'm just not going to use credit. I'm going to close it. I'll keep one credit card open, but I'm never going to use it." Well, we've had a couple of clients recently where their credit was great, and then they didn't use their credit card for six months, and their score went to zero. Zero. Now, with certain loans, we still have programs where we can work with no credit scores, but it's not like you can go back in that time machine and get back to that 760. And a zero credit score loan is going to be more expensive in rate than if you're at a 700, really any other score would be higher than zero. So, you really want to be mindful that you don't go overkill.
Okay, so if it's me and I'm applying for a loan, I am not going to open any new cards. I am not going to close any cards. If this is a purchase, out I am not going to buy a car in a million years. I am not going to refinance a car, because some people go, "Well, I'm refinancing a car, so I'm actually lowering my debt, right?" But you're also getting an increase. Yeah, you're getting an increase. So you really need to be mindful of those three pieces.
Now, if you guys have questions or comments, as always, reach out. I am licensed in 48 states to do mortgages. I am happy to help you guys whenever I can, so is my team. But those are the three big things on credit. I know there's some great YouTube channels, some great Reddit forums where they really analyze it, you know, within an inch of its life, and I commend everyone who does that. I think it's great. I learned so much from you guys. But bottom line, for you know, anyone who doesn't want to go that deep, pay your bills on time, keep your balances low or pay them off consistently, and don't open or close new credit.
Okay, as always, thanks for watching, guys. Anytime you need anything, I'm here for you.
Summary:
General Tips:
Overall, the goal is to demonstrate financial responsibility and stability to the lender. Paying bills on time, managing debt utilization effectively, and being prudent with credit lines are the key steps to prepare your credit for a home purchase.