Credit Boost Needed? Mortgage Loan on the Horizen

[Anonymous]

Hello All,

My wife and I would like to obtain an mortgage soon (preapproval later this month).  Here is our situation:

My wifes credit score is around 640.  She has no credit cards in her credit history.  Right now she has two student loans (deferred) for 7.5k each.  What would be the best way to 'boost' her credit up?  Should she start paying the loans at the minimum month balance?  Or should she just pay them off in full all at once (lump sum)?

Secondly, should she apply for a credit card?  Will this cause her score to drop due to the hard inquiry?  Or, will her score go up due to the increased available credit? 

What is the liklihood of us being approved for a decent mortgage loan?  My credit score is 750, out dti ratio (for all debts including mortage payment) would be around 32%.  We are looking at a downpayment of around 10-12%.  We both have no collections or anything bad on our credit reports.  The only negative thing would be her 'lack' of established credit history (although she is still given a score) and her somewhat 'fair' credit score.

We are recent graduates and can supply transcripts to the mortgage lender as well (so no 2 year empolyment history at our 'career' type jobs).

Any ideas on the best way to 'boost' her score in thr short term would be great.  Any mortgage advice (programs, etc.) would be helpful as well.  The price of the home we are looking at is around 330k and would be outside fha limits.  This is in Colorado.

Thanks!! (Sorry for 10 million questions)

[Anonymous]

Though this question is appropriate here, you might want to head over to the rebuilding forum as well even though you're really just "building". Lol. How long are you looking to wait to purchase? It sounds like you may qualify for FHA loan for first time home buyers. Their min credit score is 580 but most lenders are going to look for a 620 as their min overlay. A 640 would be fine and still get you a decent rate. No baddies and the appropriate DTI makes you look really good to a lender. also they will pull a trimerge credit report, which merges both yours and her credit history. So as long as she has a score, they won't necessarily be able to see which trade lines were here or yours. They will use the lower of the middle of your scores and all your credit trade lines together plus your DTI. But they will also need to see reserves. Most banks look for at least 2 months of what the mortgage payments will be in a bank account or other investment or 401k account. With FHA you will most likely need at least 3.5% downpayment as well. Do you have savings?

In short, your credit profile will look decent as is to a lender if you go FHA or USDA. As long as you have savings you will probably be approved.

However, having said all that, your employment history may be an issue. They like to see at least 2 years of employment with your current employer or at least 2 years of employment in the same industry. Also, you wife COULD take some time increasing her score by adding additional trade lines. She doesn't NEED to, but if you guys have 6 months to wait, she will get the best boost to her score by adding a few trade lines and having a better "mix" of credi. She already has an installment loan but she's not showing any payment history on it. Don't pay it off! But financially and for her credit report, it makes sense to maybe start paying the interest on the loans every month, even though they are still deferred (in deferment the interest still compounds so paying it a little early helps anyway). That will start to show positive payment history and boost her score a little. Then, to maximize her score, she need 3 total revolving lines. Credit cards or store cards. I hate to tell a young couple just starting out to go out and get some credit cards! But honestly that's what lenders and the credit bureaus like to see. It's part of the algorithm to a good score IF it's managed right. I learned the hard way. So get 3 revolving lines, keep 2 at 0% utilization and 1 at less than 10%. Reporting that will give an immediate boost to her score. Now, once you're in your new house, you'll not be worried so much about scores and you'll be concerned about growing those trade lines but that's a different topic and you can visit the credit cards forum for that. Sorry for the long winded response. I hope this helps and good luck!

[Anonymous]

Great thanks for the reply.  If we put 10% down we would still have approximately 5-6 months worth of savings to cover the mortgage monthly payment.  Going off what you said, we might put a slightly larger % down and have 2-3 months of savings instead.

Our employment history is short because we are recent graduates.  I finished my masters in December '14 and started my job in Febuary.  She finished her bachelors in May '15 and started her job in August (she is a teacher).  Both of our careers are in similar fields to our majors.  Before graduating, I worked at the same employer for close to 8 years.  She also worked at the same employer for close to 4.  These were part time jobs during college.

It sounds like the best course of action is to start payments on her student loans (but not pay it off yet), and use this to build her credit up in the next few months.  It also sounds like obtaining a credit card for her would be ideal.  However, I don't want her score to drop from another 'hard' inquiry (as we already had one for the mortgage) and so am slightly leery about having her sign up for a card right now .

Perhaps the safest route is to just pay her student loan monthly and wait on the credit card?  Also, her fico score is 640 based on fico score 8, but her fico score goes to around 680 when looking at fico scores 2/4/5 which have a description of being common for mortgages.  Being inexperienced here, which is more likely to be pulled? 

One of the problems with FHA is that their loan limit to too low for the home we are looking at.  USDA won't work either as we are slighly above the income limits for the program.  We are thinking perhaps the CHFA loan.  Otherwise we might look at some credit unions but are not sure if our current financial situation would qualify us.

Lastly, how accurate is the fico score simulator on here?  This shows that obtaining a credit card for her will boost her score, however, I am not sure about how accurate the simualtor is.  Any insight is appreciated.  

Thanks for the help so far