Improve Your Credit Scores with Lasting Results
by Sergio in Volutia County, Florida and by Suzanne in Florida
Ask Kate how to improve your credit score with lasting results: Sergio is trying to refinance his mortgage but his late house payments are a hindrance to loan approval. He asks what he can do to get a lower interest rate. Suzanne is preparing to buy a home. Before she starts her mortgage pre-approval, she is paying off collections.
Suzanne wants to know if this will strengthen her credit and raise her credit scores. When you read her letter, you will see why I say that paying off collections tends to be a mixed bag!
How Do I Reduce an Interest Rate after Late Payments on My Mortgage? By Sergio P. S. in Volutia County, Florida
With my average credit rating, how can I change or reduce my mortgage interest rate?
I have a United Nations Federal Credit Union (UNFCU) mortgage in Florida at the rate of 6.9, fixed rate, for the past 12 years on a 30 year loan. I'm now retired and having problems meeting the mortgage. Sometimes I am one or two months late.
My credit rating is not the best. How do I shoppe around for house insurance in order to cover the remaining balance I owe to the UNFCU mortgage company?
Best regards, SPS
Ask Kate answers: How Do I Reduce an Interest Rate after Late Payments on My Mortgage?
Paying your mortgage 30 days late, even one time, will negatively impact your credit rating.
More than one late payment and credit scores begin to plummet.
I suggest a two-prong approach to your situation.
- Pursue an FHA refinance
- Build up your credit to improve your score
FHA Mortgage Refinance
In spite of your credit issues, initiate a call to a lender for a Federal Housing Administration (FHA) refinance.
I say this because FHA financing is more forgiving to less-than-perfect credit.
With FHA, a borrower gets the best of both worlds - More liberal underwriting guidelines and a secure fixed rate mortgage without prepayment penalties or balloon payments.
This is not to say that there are no guidelines to meet. In fact, depending on how often your mortgage payment was late, how long ago it was late, and how many days it was late, you may need to improve your credit and your credit score before you can refinance your home.Read more about FHA loan requirements here
Strengthen Your Credit Profile by Improving Your Credit Score
Reducing debt is one of the best ways to improve your credit. Lenders feel squeamish when they see someone applying for a mortgage whose credit cards are maxed out.
In fact, the amount available credit compared to how much credit has been used is a major factor in credit scoring.
For example, let's say you have a Visa with a $5000 limit. If you have charged $500, you have an available balance of $4500. This sends a signal to the underwriter (a person with the authority to approve a mortgage application) that you are managing your credit wisely.
Conversely, if your credit cards have minimal available balance, this will be reflected in lower credit scores.
I have actually written a book on how to get out of debt and pay off your mortgage early. Anyone can do this because it does not require a second job, extra cash, or cutting back on your lifestyle.
Learn how to pay off debt including your mortgage at The Mortgage Freedom Project: How to beat the bank at its own game
How to Shop for Homeowner's Insurance
When you shop for homeowner's insurance, I do not suggest calling around for the lowest premium. The quote will be useless if the coverage is insufficient to meet the requirements of your lender.
Instead, contact your loan servicer (or credit union in your case) to obtain their insurance requirements.
At a minimum, mortgage lenders require borrowers to carry enough fire coverage to pay for a house to be rebuilt in the rare chance that it burns to the ground.
Then ask friends and co-workers for the names of their insurance agents. Set aside an hour or so when you won't be interrupted to call a few of the agents.
Ask them to estimate a premium by meeting your lender's minimum requirements, including any extra coverage of your choice. For example, you may want to insure the contents of your household.
Now you'll have meaningful quotes to compare.
I explain more at How to Get a Mortgage Part 4: Meet Your Home and Fire Insurance Agent
Paying Off Collections Before Mortgage Pre-approval By Suzanne in Florida
My husband and I have about six things in collections and we are paying them off before we go for our pre-approval for a mortgage.
Will this help our credit rating go up?
We are keeping documentation on each bill as we pay it off.
How long after we pay it off does the collections agency have to report it to the major credit bureaus to show its paid?
Ask Kate answers: Paying Off Collections Before Mortgage Pre-approval
Paying off collections is a mixed bag. So first let's take a look at NOT paying your debts that ended up in collections.
Then we'll discuss how paying collections for less than owed or paying them in full impacts credit scores.
Walking Away From Collections
As the last active date on a collection ages, there is less negative impact on your credit score. Theoretically, if there is no change to its date, the collection should fall off a credit history after 7 years.
However, once the account is sold to another collector, all bets are off. It's possible for the date to be brought current. Thus it appears as a new collection on credit reports which lowers credit scores.
Here's another drawback to walking away from collections. Some banks and specific mortgage programs have guidelines that will not approve loan applications for borrowers with collections, regardless of the last active date on the account.
Paying Off Collections I
As an alternative, it might be possible to negotiate a reduced payoff. For example, $10,000 is owed on a credit card but the collection agency accepts $5000 as a reduced payoff.
But wait to hear the result before becoming too enthused. Although creditors will often agree to settle for pennies on the dollar, the collection will remain on a credit report stating Settled for less than owed
This can often be the kiss of death for borrowers, depending on the loan program and lender.
Paying Off Collections II
So let's take a look at paying off the collections in full. It has been disheartening more than once to discover how paid collections temporarily lowered credit scores. Again, this is because once paid, the account is updated.
However, the good news is that credit scores generally rebound more quickly after paying a collection.
Improve Your Credit with Lasting Results
Each of the 3 options have their drawbacks. But if you have the means to pay the collections in full, I am of the opinion that credit scores will improve more quickly with less chance of reappearing in the future.
I realize that tricks for improving credit scores are common on the internet. Some are even fraudulent. Be cautious what you read and the action you take, including paying an unknown agency to do a so-called 'credit clean-up'. The results are often temporary, in spite of exorbitant fees.
Truth be told, long-lasting improvement in credit scores comes from paying off collections. I know that isn't a flashy concept but in the long haul, it works!
Go to Fixing Bad Credit - How to Pay Off Collections
to learn how to document paid collection accounts.
Major Credit Reporting Bureaus
You also asked how long before a collection agency reports a paid account to major credit bureaus. I'd plan on at least a month. Click here to read more about major credit reporting bureaus
It's refreshing to hear how you are preparing your credit for the loan process. It may take a little longer but the peace of mind will be worth the wait! Good job!Read more about Mortgage Pre-approval - Home Buying the Easy Way