My new clients, Dave and Mindy, had saved enough cash for a down payment and closing costs and were ready to buy their first home. They were in my office seeking a pre-approval. They hoped to buy a home for $450,000 with a 10% down payment.
A credit score problem
I filled out their application for them and pulled their credit report. Mindy’s score was 740, but Dave’s was 685—adequate for loan approval, but the adjustments to the loan’s rate or points would raise the cost of the loan substantially.
Low scores are expensive
I explained to Dave and Mindy that most people have three credit scores, one from each of the three credit bureaus. Lenders disregard the high and low scores, using the middle score when approving borrowers.
Even though a 620 score is adequate for loan approval, lenders apply “risk-based pricing” to loans that will ultimately be owned by Fannie Mae or Freddie Mac. Lenders calculate these adjustments using a table containing different credit scores. A loan for a borrower sporting a 740 credit score would have no discount points (one point is 1% of the loan amount paid at closing), the same loan for a borrower with a 680 score would have to pay 1.25% of the loan amount to get the same rate.
Alternatively, they could opt for a slightly higher rate—about .375% higher—to avoid paying discount points.
In Dave and Mindy’s case, the low score would increase the cost of their loan by more than $5,000, or give them a monthly payment nearly $90 higher.
The culprit behind the credit report issue
I looked at the “derogatory” section of the credit report, searching for the reason for Dave’s low score. The culprit was a credit card for a big-box hardware store. The store was reporting that the account, which had a balance of just $60.00, was currently delinquent and 30 days late. The delinquency was very recent—less than two months.
“Do you recognize this account?” I asked Dave, showing him the report.
“Yeah,” he said, a little sheepishly. “I may have, uh … misplaced the statement last month. I hardly ever buy stuff at that place.” Mindy gave him a sharp look.
“Hey, it happens,” I said. “This one account is hurting you in two ways: First, it’s a very recent negative, and the more recent these things, are, the bigger the impact on your score. Second, it’s reported as being currently past due. That could be costing you 30 or 40 points on your score.”
The plan to fix the credit score
I told Dave to make the payment right away, then call the credit office of the store. He should tell them the truth—that he simply overlooked the payment that one time, and ask them to remove the late payment as a gesture of good will. After all, he was a very good and loyal customer and had always paid on time.
“Do you think they’d actually do that?” he asked incredulously.
“There are no guarantees,” I said, “but there’s no downside. The worst that can happen is that they just say no. If they say yes, it’ll save you a lot of money. Just make sure they send you a letter confirming that your account is in good standing.”
Dave agreed to the plan. A week later, he called me. He was exuberant. “You’re not gonna believe this!” he said. “They took it off! They changed the report! They’re sending me a letter!”
The happy ending
A week later, I pulled a fresh credit report. The derogatory entry was gone—and Dave’s middle score had risen to 741. This illustrates just how profoundly a recent delinquency—even for a small amount—can affect a credit score, and the cost of a new mortgage. Dave and Mindy were able to cut the cost of their new loan by more than $5,000, with one simple phone call.
It’s a simple lesson: a low credit score is not something carved in stone, dooming you to a higher rate or cost of money. It is always worth making the attempt to improve the picture.
Sometimes, one phone call can pay big dividends.
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