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Slippery slope..how should I approach?

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Slippery slope..how should I approach?

Hi all,

 

Would love to get your opinion on how I should approach my next 6 months before I set on an interest rate / program for a house that I'm currently having built.

 

My middle credit score currently sits at around mid 650's. My purchase price is $289,000. I've already been pre-approved for an FHA loan just for the builders records so they can continue their process.

 

My credit card debt currently sits ~$7,000/$13500. I know paying this off could make a big difference in my credit score, but I'm currently balancing between saving for the down payment / reserve fund / furniture, etc.

 

As I stand, I have ~$11,000 in a savings account. I plan to grow this to ~$30,000 by the time I close (May, 2015). I plan to either put down 3.5% (~$11,000) if I go FHA, or 5% (~$14500) if I go conventional.

 

That being said, I've been applying basically every dollar I have towards my savings while paying off the minimum payment on my credit card. Would it be smarter if I start making larger payments on credit card each month (maybe $500/mo?) and have a bit less savings when I close so I could potentially qualify for a better rate?

 

Would I see a large difference in my credit score from paying my credit card balance down to ~%30? I currently have two baddies on my credit report from 2008 (charge-offs) that both are paid off in full..just waiting for them to drop. I've tried mailing, emailing, and calling these two companies (BoA and Capital One) and they're not willing to remove them early.

 

Any insight on how I should structure my finances moving forward would be great.

 

Thanks,

 

 



Starting Scores (10/18/2013): EX: 603 | EQ: 572 | TU: 659
5/05/2014 EX: 628 | EQ: 627 | TU: 623
5/25/2014: EX: 628 | EQ: 635 | TU: 623
Current Scores: EX: 670 | EQ: 663 | TU: 681
Goal Scores: 680 across the board


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Message 1 of 10
9 REPLIES 9
Senior Contributor

Re: Slippery slope..how should I approach?

When is the construction supposed to be completed. About 60 days prior to that date would be a good time to lock your mortgage rate. A few more points on your scores will not affter your FHA mortgage rate. Pay down your debt as you feel comfortable doing but be careful to not leave yourself with too little cash when you close on the house.

Message 2 of 10
Moderator Emeritus

Re: Slippery slope..how should I approach?


@ezdriver wrote:

When is the construction supposed to be completed. About 60 days prior to that date would be a good time to lock your mortgage rate. A few more points on your scores will not affter your FHA mortgage rate. Pay down your debt as you feel comfortable doing but be careful to not leave yourself with too little cash when you close on the house.


I agree. The cost of a house is just beginning at closing.

Message 3 of 10
Frequent Contributor

Re: Slippery slope..how should I approach?

Thanks for the feedback, guys. I wanted to leave the option open for going conventional, if it makes more sense then going FHA. Would a higher score make going conventional make more sense?

 

The house is set to be completed / closed on in May, 2015. Closing costs are being paid by the builder. I'm looking to have ~$5,000 for fridge / washer / dryer / blinds. I also wanted to have about 3-5 months of mortgage in my savings as a reserve.

 

Is there anything else I should be aware of? I have enough furniture (bed set, couch, tv's, desks, etc.) for now, but will look to upgrade in the future.

 

Thanks!

 



Starting Scores (10/18/2013): EX: 603 | EQ: 572 | TU: 659
5/05/2014 EX: 628 | EQ: 627 | TU: 623
5/25/2014: EX: 628 | EQ: 635 | TU: 623
Current Scores: EX: 670 | EQ: 663 | TU: 681
Goal Scores: 680 across the board


Take the myFICO Fitness Challenge
Message 4 of 10
Moderator Emerita

Re: Slippery slope..how should I approach?

Conventional loans are better when your mid-score is 680 or higher.

 

Conventional loans are score sensitive and FHA loans are not.

 

Conventional loans have a lower PMI when your mid-score is above 680 and a much lower PMI if your mid-score is above 720

Message 5 of 10
Frequent Contributor

Re: Slippery slope..how should I approach?

That being said, if my mid score is correctly mid 650's, would lowering my utilization rate potentially push my score to the 680 range, and would going conventional at that point be better than going FHA?

 

That's why I'm thinking to possibly start paying off more towards the card?

 

Thanks!



Starting Scores (10/18/2013): EX: 603 | EQ: 572 | TU: 659
5/05/2014 EX: 628 | EQ: 627 | TU: 623
5/25/2014: EX: 628 | EQ: 635 | TU: 623
Current Scores: EX: 670 | EQ: 663 | TU: 681
Goal Scores: 680 across the board


Take the myFICO Fitness Challenge
Message 6 of 10
Moderator Emeritus

Re: Slippery slope..how should I approach?


@guykara wrote:

That being said, if my mid score is correctly mid 650's, would lowering my utilization rate potentially push my score to the 680 range, and would going conventional at that point be better than going FHA?

 

That's why I'm thinking to possibly start paying off more towards the card?

 

Thanks!


Managing CC utilization can definitely help.

 

Everyone's situation is different and there is no one size fits all approach to this and therefore no "ideal" number but what seems to work well for most people is to have only one of their cards report a small (<9% of it's credit limit) balance each month and then pay in full before the due date. You can use it as much as you want during the month but what's important is the reported balance because for most cards whatever is reported on the monthly statement is what is used to calculate utilization for the month.

You might have to play around with the percentages for a few months to see what works best for you. Some people say that 1-3% utilization helps the most. For others it might be 5-9%. As I said it's not one size fits all.

On any other cards always try and have them report a zero balance each month. That doesn't mean you can't use them just make sure that the desired zero balance on these accounts is achieved several days before their statements post.

Along with individual and overall utilization, FICO also scores the number of all types of accounts reporting a balance.at any one time Making sure less than half of all your accounts report a balance helps most people.

Now this approach really isn't necessary if you're not looking to apply for any credit in the near future or unless you are trying to tweak your score for maximum effect but some folks do this as a hobby just to see how high they can get their score.



Message 7 of 10
Frequent Contributor

Re: Slippery slope..how should I approach?

Thank you for this information. Do you think it would be better to aim for that 680+ score and go conventional, or be satisfied with FHA?



Starting Scores (10/18/2013): EX: 603 | EQ: 572 | TU: 659
5/05/2014 EX: 628 | EQ: 627 | TU: 623
5/25/2014: EX: 628 | EQ: 635 | TU: 623
Current Scores: EX: 670 | EQ: 663 | TU: 681
Goal Scores: 680 across the board


Take the myFICO Fitness Challenge
Message 8 of 10
Frequent Contributor

Re: Slippery slope..how should I approach?


@guykara wrote:

That being said, if my mid score is correctly mid 650's, would lowering my utilization rate potentially push my score to the 680 range, and would going conventional at that point be better than going FHA?

 

That's why I'm thinking to possibly start paying off more towards the card?

 

Thanks!


All good questions...and think you just need to weigh the pros and cons....

 

1.  FHA - you already have the credit score to qualify.  No need to pay off your debt to reduce your utilization at this point.  No reserves required with FHA, so you CAN put more down that the 3.5%.  Or bank it for a future home improvement, etc... or just put it in savings.   With FHA  you will pay higher PMI.... no way around it.  And it's a LOT higher.

 

2.  Conventional - I've found the rates a little lower in my state.  Lower PMI, but generally require a minimum 680 to get decent rates.  Most conventional loans DO require you to have anywhere between 2-6 months reserves, sometimes more depending on the circumstances.  And if you don't have 20% down, you still pay PMI. 

 

Have your loan office run the numbers with conventional, and see what the difference comes out to be.  Depending on how long you have to raise your score, you "should" be able to do it... especially if you're sitting on some pretty highly utilized credit cards Smiley Happy

 

 


Current FICO Scores: EQ749; TU732; EX733
Message 9 of 10
Frequent Contributor

Re: Slippery slope..how should I approach?

Thanks Barneygirl!



Starting Scores (10/18/2013): EX: 603 | EQ: 572 | TU: 659
5/05/2014 EX: 628 | EQ: 627 | TU: 623
5/25/2014: EX: 628 | EQ: 635 | TU: 623
Current Scores: EX: 670 | EQ: 663 | TU: 681
Goal Scores: 680 across the board


Take the myFICO Fitness Challenge
Message 10 of 10
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