What's in a point? In credit scores, big bucks

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A 619, 639, 659, 679, 699, 719 or 739 credit score …

… Can cost you thousands. A 620, 640, 660, 680, 700, 720 or 740 credit score can therefore potentially save you thousands.

One of the primary factors in how lenders assess risk is by your credit score. The credit scoring system is a mathematical formula that will be a major factor in the interest rate you obtain for your mortgage loan, and how much your loan will cost. If your credit score is 740 or better, you will not have to pay any premium for obtaining any type of mortgage loan. However, every 20 points can have an impact, and being off by just one point can have major consequences.

The difference between a 679 credit score and a 680 credit score doesn’t sound like much, but it can literally be the difference in having a fee assessed of hundreds, if not thousands, of dollars at a particular interest rate.

For example, in this situation, FHA lenders assess a one-half percent fee on your loan amount. If you are borrowing $200,000 for your home loan, one-half percent equals $1,000, for just one measly point on your credit score.

The smart thing to do before applying for a mortgage loan is to obtain copies of all of your credit reports directly from the credit bureaus (Experian, Transunion, Equifax). You can access each of your credit reports for free through www.annualcreditreport.com. There are many things that can be done in less than a week to raise your credit score a few dozen points, as any credit expert can tell you.

If you are curious about your credit score, do not buy your credit score online. The score you obtain online is not the same score as what is used for mortgage-credit reporting.

Just obtain copies of your credit report and contact an expert on the credit scoring model to determine what, if anything, can be done to improve your score before applying.

But be careful: Paying off debt can actually lower your credit score. This is true if you pay off a collection account more than one year old, or if you pay off car loans or student loans — even if they’re in good standing. The credit scoring model does not follow conventional wisdom and can be very unforgiving.

As you are considering a lender for your home purchase or refinance, be sure to choose a mortgage professional who will help you understand how to maximize your credit score based on your unique circumstances.

This will minimize your interest and up-front costs on your loan. And if they should recommend paying off collections or installment loans as a strategy to increase your credit score, you now know that they know less than you do about the credit scoring system.

Gabe Terreson is a 17-year industry veteran who regularly conducts workshops and seminars for mortgage consumers and real estate brokers. He is branch manager of Home Team Funding, a division of Pinnacle Capital Mortgage Corp. and can be reached at 360-993-5800, team@hometeamfunding.com or at www.hometeamfunding.com.

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