Credit Card Application Before Mortgage Improves Credit?

[Bullmoose]

Howdy!

I'm looking to buy a house in the next six months (if I qualify). I pulled my credit scores for TU and Exp from MyFICO.com. TU is 641, Exp is 665. I had a BK in Aug. '08. BK due to unemployment. BK included my home. I currently have one 36mo auto loan and is 10mo old, and nothing else since the BK. The auto loan is the only recent history on the reports. Using MyFICO's score simulator, it suggests getting one credit card would add 20 to 50 points to my current scores. This seems to fly in the face of logic which would suggest getting credit right before applying for a home loan would be a negative. Should I get a credit card?

Thanks!

[Denita]

If you are planning to get an FHA loan, most lenders are looking for 3 active tradelines. You have the auto loan reporting so that is one tradeline. You might consider having two cards. Even if they are low limit cards, the lender is looking for how responsible you are with credit so keep your balances at zero. Stay away from the subprime cards like First Premier and Credit One.

Do you have a credit union where you can go to get a card? That will be a better solution.

Also, when did the bank foreclose on the mortgage lien on your house, before BK or after Bk?

[Bullmoose]

Thanks for the response.

Are you recommending I get two credit cards just a month or two before I apply for a mortgage? I would think that would lower my credit score and possibly disqualify me for a mortgage. You don't think it will? I can see doing that a year or two before, but that's not currently the evil plan.

Foreclosure proceedings were frozen while bankruptcy was being completed. All loans against the home were included in the bankruptcy. Foreclosure re-started and ultimately finished after the bankruptcy was discharged?

Thanks Again!

[Denita]

Thanks for the response.

Are you recommending I get two credit cards just a month or two before I apply for a mortgage? I would think that would lower my credit score and possibly disqualify me for a mortgage. You don't think it will? I can see doing that a year or two before, but that's not currently the evil plan.

Foreclosure proceedings were frozen while bankruptcy was being completed. All loans against the home were included in the bankruptcy. Foreclosure re-started and ultimately finished after the bankruptcy was discharged?

Thanks Again!

Yes, f/c is always frozen during bk unless the lender comes back and asks for a Motion of Relief to sell during your Bk. There are two aspects to giving back your real estate in BK. The first is the debt release you receive as a result of your BK discharge. The second is the lien release the lender gets when they f/c or if you end up short selling your property. The time period from the lastest event, in your case the f/c sale, is 3 yrs from the time the title transferred from you to the bank. What I mean by that is the new mortgage you get will need to be at least 3 yrs from the time the mortgage lien on your last home was transferred from you to the bank. FHA allows as little as 3 yrs, conventional requires substantially more time (at least 5 to 7 yrs).

Normally I would say not to apply for any credit for 6 months or so prior to getting any mortgage. However that is assuming you have at least 3 open tradelines on your credit. You said you have only one open line. FHA requires a min of 3 open credit lines. You don't really have to use the cards, just have them open and reporting a zero balance. Your score will take a very small hit for a month or two and then increase, especially if you keep the balances at zero.

[Bullmoose]

I spoke with a mortgage broker yesterday. After I felt he was worth working with, I let him pull my credit. I addressed my concerns regarding the tradelines with him. He wasn't worried. He called one of his loan underwriters and asked them as well. From the sound of things, it would be nice if I had another tradeline or two, but having 19+ years of positive credit history before the bankruptcy, plus two years of good payment history for the place I'm renting, and they said I'm good to go. They wanted to make sure my rental history would be coming from a Property Management Company and not some unknown landlord.

He said they'd use the highest of my lowest two credit scores as the loan criteria. 665 is my number. Anything above 660 is good for the lowest rates per him. This was very surprising to me, but I was happy to hear it. He tried to talk me out of looking at 203Ks or VA loans simply because of the extra work it required. He said he'd do it if I wanted, but he didn't recommend it. He also said for a FHA conventional, they want 3.5% Statutory Down Payment, but closing costs, points, etc... could be worked into the loan. They also require that it's been three years since the foreclosed house actually sold, so that pushes things out a little bit more, but I'm still good.

On a side note, I completely wasted my money going to MyFICO.com and pulling mine and my wife's credit reports. He got me more information for $25 than I got paying $80. MyFICO is using a different scoring criteria for TransUnion. To my surprise, my TU score was 20 point higher than what MyFICO showed.

Good news all around!

[Denita]

Wow, that sounds great! I am really surprised that they don't require any tradelines except the auto loan and that they are using your history from before the BK. Did he pull all three of your reports? All the lenders I work with use the middle score of the 3 scores rather than the highest of the lowest scores. (Maybe I'm not understanding your particular lenders process either!) Anyway it sounds very good.

In all the underwriting material I have read/seen/experienced the underwriters are using credit established after the BK and not the credit before you filed. You might want to clarify that particular point with your LO just in case.

Good luck with your loan, it sounds like you have a very good start!

[willingtocope]

On a side note, I completely wasted my money going to MyFICO.com and pulling mine and my wife's credit reports. He got me more information for $25 than I got paying $80. MyFICO is using a different scoring criteria for TransUnion. To my surprise, my TU score was 20 point higher than what MyFICO showed.

First, good that things are probably going to work...

Second, you got caught by the way the FICO actually works. What they sell you is the FICO Consumer Score...your mortgage broker / underwriter will use the FICO Mortgage Score. Different algorithms.

[Bullmoose]

Did he pull all three of your reports?

Yup, all 3. Heck I couldn't even get all three doing it myself!

All the lenders I work with use the middle score of the 3 scores rather than the highest of the lowest scores.

If you think about it, selecting the highest of the bottom two, or the lowest of the top two, it's all the middle when there are only three reports out there. Why he said that and not "we'll use the middle score" I don't know.

In all the underwriting material I have read/seen/experienced the underwriters are using credit established after the BK and not the credit before you filed.

I probably wasn't clear enough. They aren't using my credit from before my BK per se, but they are using my credit history. They can clearly see from my history that I was a good consumer of credit for a very long time then poof, something happened and I filed BK. Then, after the BK I've once again showed good credit responsibility, even if it's very limited to this point. That's providing them a track record that is helping them deal with the BK, and I'm sure helping them to determine their risk ...and to be quite honest, I got the feeling that someone is starting to open up their cash reserves and take a risk or two. I personally don't see how they'd even look at me unless my credit was 50-points higher.

Good luck with your loan, it sounds like you have a very good start!

Thanks!

[Bullmoose]

...you got caught by the way the FICO actually works. What they sell you is the FICO Consumer Score...your mortgage broker / underwriter will use the FICO Mortgage Score. Different algorithms.

Actually, I didn't see that. When comparing what I pulled to what they pulled, my Equifax was exactly the same telling me they used the same models. I couldn't pull Experian so I didn't have a point of reference, but from my experience before Experian took FICO away, it was right where I expected it to be. For the TransUnion, I had read somewhere else MyFICO.com uses the TU98 model. When they broker pulled my credit, I see they used the TU04 model. If MyFICO would just update and use the TU04 model, which from what I've read is the more commonly used model by lenders, then it would all come out the same. In this case, the TU04 model was worth an extra 20 points over the TU98, and TU suddenly went from the worst of my three scores to the best. Go figure.

[willingtocope]

The fact that your Equifax numbers were the same was merely a coincidence. If I could leagally claim to have had anything to do with writing the CRA's software, I would assure you that the models are different.

[Patz]

Willingtocope is exactly right. As a consumer, you will never be able to pull a "mortgage" credit score. In your case, yes, it is pure coincidence that you got 2 numbers that were the same.

I caution you to stay alert. It wouldn't be the first time that a mortgage person misled a borrower. Not that what he is saying isn't possible. It is. Lenders can have their own FHA overlays that might make qualifying easier or more difficult. Depends on the lender. A lender called JB Nutter used to relax the guidelines all the time. Lenders that have no intentions of selling their loans can also be more lenient with underwriting.

But if I were you, I would confer with at least 2 more solid mortgage brokers to get their opinion. Don't let them pull credit. Tell them the scores the other person gave you & let them work with that. Preferably call a smallish broker or lender. "Solid" meaning not just some dude on the other end of an 800 number. Do a google search for something like "mortgage loan officer blog idaho." It will let you find possible Loan Officers who take their job seriously enough to have their own blog & keep it updated with great info. This is rare, so if you find one, contact him/her. Here's an example of someone's personal blog: The Mortgage Porter. This woman gets a ton of business from her blog. You can just tell she is knowledgeable.

If I were you, I would also try asking your question on Zillow. Lots of mortgage pros there.

Good luck.

[acarter]

If you are planning to get an FHA loan, most lenders are looking for 3 active tradelines. You have the auto loan reporting so that is one tradeline. You might consider having two cards. Even if they are low limit cards, the lender is looking for how responsible you are with credit so keep your balances at zero. Stay away from the subprime cards like First Premier and Credit One.

Do you have a credit union where you can go to get a card? That will be a better solution.

Also, when did the bank foreclose on the mortgage lien on your house, before BK or after Bk?

Thanks Denita! I didn't know you needed 3 active tradelines. I only have one right now (a secure credit card) and my credit is at 509. I have some work to build it up, but I'm looking to get a mortgage at the beginning of 2013.

[Patz]

Thanks Denita! I didn't know you needed 3 active tradelines. I only have one right now (a secure credit card) and my credit is at 509. I have some work to build it up, but I'm looking to get a mortgage at the beginning of 2013.

acarter, many fha underwriters will let you use credit alternatives to qualify. For example, maybe you can show you have paid your utility bills on time for the past 12 months, or the phone bill, etc. It's actually written in the FHA underwriting manual. Many times, individual lenders have their own rules and whether they will overlook something (compensating factors) depends on the ENTIRE loan file.

It helps if your secured card is from a prominent, reputable bank that isn't an obvious secured card. Many banks are now reporting to the credit bureaus that cards are "secured." Not altogether a bad thing, but not what it used to be.

If you get another secured card, see the list from bankrate.com: 2011 Credit Card Fees survey results | Bankrate.com. Bankrate always has the best, up-to-date list available.

In case you don't know, to keep your score highest, do not go over 30-40% of your credit limit. Or, make sure you are able to pay the balance down to that amount a couple months prior to applying for your mortgage.

Good luck to you next year.