Common Credit Blunders to Avoid When Buying a Home
On this episode, sponsored by IBERIABANK/First Horizon, Tony Umholtz discusses common credit blunders when buying a home.
About Today’s Guest
Tony graduated Cum Laude from the University of South Florida with a B.S. in Finance from the Muma College of Business. He then went on to complete his MBA. While at USF, Tony was part of the inaugural football team in 1997. He earned both Academic and AP All-American Honors during his collegiate career. After college, Tony had the opportunity to sign contracts with several NFL teams including the Tennessee Titans, New York Giants, and the New England Patriots. Being active in the community is also important to Tony. He has served or serves as a board member for several charitable and non-profit organizations including board member for the Salvation Army, FCA Tampa Bay, and the USF National Alumni Association. Having orchestrated over $1.1 billion in lending volume during his career, Tony has consistently been ranked as one of the top mortgage loan officers in the industry by the Scotsman’s Guide, Mortgage Executive magazine, and Mortgage Originator magazine.
Summary
Tony Umholtz, a mortgage manager for IBERIABANK/First Horizon, discusses the impact of credit on purchasing a home and common credit blunders that he has encountered when working with pharmacists during the lending process for the pharmacists home loan product.
Tony explains how credit and your credit score can impact your home buying process. Your credit score can affect your interest rate for a home loan. He details how credit information is collected and how the three main credit bureaus, Experian, TransUnion, and Equifax, aggregate your FICO score. Tony lays out how the scores are calculated, with payment history making up 35% of the score, credit utilization making up 30%, length of history with 15%, and credit mix with 10%.
Some common blunders that Tony has seen when working with pharmacists include having no credit or limited credit history, maxing out a 0% interest rate credit card, and relying on third-party credit tools for an accurate FICO score. Tony further shares that clients may not be checking credit reports and correcting errors that may appear on those reports. During the home loan process, borrowers have also made the credit blunders of co-signing for a loan without fully knowing how it would impact their credit and applying for credit for large purchases like a car or furniture for the whole before the sale is final. The lender knows and can see those last-minute credit applications and changes, and those changes can impact your loan approval.
Mentioned on the Show
- Learn More About IBERIABANK/First Horizon’s Pharmacist Home Loan and Start the Pre-Approval Process
- 5 Steps to Getting a Home Loan
- YFP 204: The Current State of Buying, Selling, and Refinancing a Home
- YFP 191: 10 Common Mortgage Mistakes to Avoid
- Equifax
- TransUnion
- Experian
- YFP 162: Credit 101
- AnnualCreditReport.com
- LifeLock
- YFP Mortgage Calculator
- YFP Mortgage Refinance Calculator
Episode Transcript
Tim Ulbrich: Tony, welcome back to the show.
Tony Umholtz: Hey, Tim. It’s good to be here.
Tim Ulbrich: Excited to have you back on. And last time we had you on was Episode 204, where we talked about the current state of buying, selling, and refinancing a home. And we’re going to link to that episode in the show notes. But Tony, before we jump into the meat of today’s episode, give us the update from your perspective on what’s happening out there in the home buying market. Anything cooling off?
Tony Umholtz: Well, you know, it depends on what you mean by cooling off. It’s still — we’re still kind of dealing with a lot of the same challenges we’ve had this past year with inventory levels are still very, very low. But there’s still a lot of demand from home buyers. And you know, hopefully we’ll see some of that additional inventory come online soon. But with interest rates continuing to decline throughout the summer, there’s still a lot of demand for both new purchases and refinances.
Tim Ulbrich: I suspected as much as interest rates came back down. I know we saw a little bit of a jump up and have come back down since. So appreciate the perspective that you share on that. And so today’s episode, the idea for this episode came from a conversation Tony and I had back on Episode 191 where we talked about 10 common mortgage mistakes to avoid. And on that episode, one of those mistakes we talked about was credit. But we wanted to dig deeper, knowing that there’s a lot more to discuss and also to hear from Tony as he can share more about some of the experiences and what he sees folks making often in terms of credit mistakes that might have an impact on their lending situation and through the process. And so you know, these mistakes could lead to surprises, which surprises during the home process, home buying process, are certainly not good things. We want to avoid that. And that could be surprises in the form of a higher interest rate or surprise credit score. And again, we want to do everything that we can to avoid that and making sure that we’re ready and prepared going into the home buying and into the lending process. Tony, before we get into the common mistakes that you see folks making around credit when purchasing a home, let’s start with the mechanics. How does credit information get into one’s lending application? When does this happen? And how does a borrower get rated?
Tony Umholtz: Great question. And you know, there’s really three large repositories that aggregate all of our information as consumers. And that’s Equifax, Experian, and Transunion. So those are the three main bureaus that are out there that are gathering all the data on our credit histories. So for example, you know, any credit cards that we may have, even starting as young as 18 years old, you know, installment loans, car loans, anything — mortgage loans, student loans, all these types of creditors are evaluated by the three bureaus. So they aggregate all the data, our payment history, our performance, how long we’ve had credit, so those are essentially the three bureaus that are kind of watching us, so to speak.
Tim Ulbrich: And I want to dig in a little bit further about the impact one’s credit score can have on their application, ultimately the interest rate in terms of they’re able to access. So before we look at the numbers, remind us the components of one’s credit score, Tony. I’m specifically thinking here about the FICO score.
Tony Umholtz: Yes. So you know, typically when we look at the FICO score — and we’re starting to see a re-emergence of other scoring models, but the primary driver of our credit scores is going to be our payment history. So payment history is by far the biggest driver of our credit score. So meaning on time payments, not having a 30-day delinquency. And I want to just touch on this for a minute because it’s something that’s come up a lot over my career, my nearly 20 years in the business is let’s just say — we just had this incident with one of my borrowers this past week where they did not get a credit card statement. They were selling their house prior to buying the new home they were buying. And he missed a credit card statement that came to the home. And if it’s over 30 days late, you’re reported to the bureaus. So if it’s 15 days late, you’re not reported to the bureaus as a delinquency. But if it’s over 30 days, then it becomes late. So it’s — that’s a question that comes up a lot. And unfortunately, it’s something we had to navigate here at the last minute.
Tim Ulbrich: Oh man.
Tony Umholtz: But payment history is the biggest driver. The next would be credit utilization. And that primarily is going to be driven on revolving credit accounts. And what I mean by revolving credit accounts is going to be your credit cards that you might have or lines of credit. And those are essentially going to be evaluated based upon how much you have borrowed on that card. For example, I always advise people to try to stay at 50-70% of their credit limits. And what that means — so let’s say you had a $10,000 credit limit on your credit card and you ran it up to $9,000 balance. Well, that’s going to report adversely to the creditors, credit bureaus. And remember, credit utilization is 30% weighting of your score. It’s a big weighting. But that’s the other really big driver of your credit history. Those two alone are like 65% of the weighting of what determines your credit. And then the next couple I would say, just to add in here, is length of credit history, you know, the longer you’ve had credit, good credit, the better that’s going to weigh on your score. That’s usually about a 15% driver. And then your credit mix is about a 10% driver. So the types of credit you have is very important too. You know, do you have experience with — you know, a lot of times, people will come in before they buy their first home and they have maybe a car loan, student loans, credit cards, but they haven’t had a mortgage yet. And a lot of times the mortgage will add more — a stronger credit mix. It would be viewed stronger because it’s a bigger installment loan. It’s a little tougher to get. And then the last driver of your score is inquiries. A lot of people will call me and say, “Tony, the inquiries really hurt my score, and I don’t want this to damage my score.” But they really have the least amount of impact on your score. If you go and have a tremendous amount of them at one time, that can hit your credit a little bit. But normally, a couple of inquiries isn’t going to have much of an impact.
Tim Ulbrich: Yeah, and it sounds like, Tony, you mentioned several components here, but low hanging fruit, you mentioned payment history, so on-time payments, and then credit utilization, how much of that balance is used each month in terms of the revolving amount. Those two alone making up more than 60%. So you know, I think being in tune of if you’re looking to really optimize credit, I think of some tips here that folks may want to consider, specifically with payment history and on-time payments, something like automatic payments, right? Obviously we want to make sure we’ve got the funds to pay that money, you know, in the account that that’s coming from, but the example you gave of someone not getting a mailed statement, hopefully folks can get electronic statements, you know, as a backup to help prevent that. But something like automatic payments can really help make sure that we don’t have something like that happen, especially if you’re in the midst of purchasing a property where the timing of that is less than ideal. I would also point folks here to an episode, 162. Tim Baker and I talked about Credit 101, and what Tony just mentioned there of the makeup of a FICO score was one part of that discussion. But we also talked about credit security, the importance of understanding your credit, how credit really is a thread across the financial plan, and so credit being a very important topic as it relates to the financial planning process. Tony, I’m someone listening today, and I feel like I’ve got a good idea of my credit score. And the question that comes to mind here is how significant of an impact can this have on securing the best rates and terms? And so you know, what I’m thinking of here is 30-year mortgage, maybe because of a higher or lower credit score, we’re looking at maybe a quarter of a percent. And maybe that doesn’t look as much of a big deal on paper as it actually can be mathematically, so tell me about what the impact of this might be.
Tony Umholtz: Well, the longer term the loan is, the more impactful your credit history — your credit scores are going to be. So it’s a good point, Tim, because you know, for example, if you have a 710 score versus a 740, you’re going to get probably about an eighth to a quarter better rate on a 30-year loan having over a 740. Typically on most of our mortgages, over 740 does not get much more benefit.
Tim Ulbrich: OK.
Tony Umholtz: So a 740 score versus an 800 score isn’t going to see a huge benefit. Some of the jumbo loans that get over $550,000 may see a little bit more of a benefit because they have some pricing matrices — the matrix will go up to 780 or higher. But where you really see the impact is like if you’re under 700, right, and you’re at 660 versus even a 700, talking about a large margin risk profile added to the loan, especially on a 30-year fixed. One thing I do want to mention that I think it’s important is the shorter the term, especially on a 15-year fixed, the more flexibility you have with the credit score. So I’ve even had some customers that have been under 700 and it really impacted their 30-year rate, but the 15-year rate stayed the same because the hits don’t really adjust to that until you get even lower because a lower term, you’re paying back the loan faster.
Tim Ulbrich: Yeah, that makes sense. And I would encourage folks, even though that may not seem significant, eighth of a percent, quarter of a percent, when you’re talking about Tony’s comment, a 30-year mortgage, $400,000 or $500,000 home, you know, that can start to add up in terms of obviously difference in monthly payment because of that interest as well as the difference in what you’re going to pay over the life of the loan. And here, we start to think about opportunity costs, right? Where else might that be used in other parts of the financial plan, whether it be investing, other debt repayment, and so forth. So now that we’ve talked about the makeup of the FICO and really understanding that score components and the impact that that might have, let’s talk about some of the common mistakes that you see, Tony, folks that make when they’re applying for really any loan but here, we’re going to talk about the pharmacist home loan a little bit more specifically. And the first one I have here is no or limited credit history. So we’ve been talking for the last five minutes or so about the importance that, you know, a higher credit score can have in getting more favorable rates and terms. So if someone’s listening and they have limited credit history or no credit history, what are the problems that can present themselves there? And what are some of the solutions that they can pursue?
Tony Umholtz: Well, it’s one of those things where especially if you’re young, it’s hard to come right in with very established credit. But I would suggest, I mean, just a couple points here. You know, one thing that — and I didn’t realize, and I’ll just take my own example. But I remember my first day, first month let’s just say, of my freshman year of college, there was a credit card company on campus where you could get a credit card, right? And being the finance major that I am, I was one of those guys that didn’t charge much but used it here and there. And it helped me with my credit history. And I’ve seen that. If you can get even a small credit card even in college, even if it’s got a couple hundred dollar limit, and you use it as a wise steward, right, you’re not out there running it up, I think that’s a great way to start building your credit. That really helped me because I had a solid credit score coming out of college. And I see that with other people too. Now, student loans being paid on time, that all helps as well because student loans will show up quickly too. I do have a situation now with a client that we’ve had to like rebuild their — they had no credit. They had zero credit history, right? So there’s no score. And that becomes a real challenge, especially — I mean, for example, the pharmacist home loan, we do — you don’t have to have a real in-depth credit history. You really can have a fairly young credit history, but you have to have a score. You know, we have to know what that score is. The only other option we have if you have no credit score that we have available is FHA where we essentially kind of have to build your credit history to some degree. But that’s kind of a rare thing these days. But that’s — every now and then, we run into that. I would just say to start building it early. Having some credit is not a bad thing. Just be responsible with it.
Tim Ulbrich: Tony, I’ve heard you say that before about for those that have no or limited credit history, the FHA is an option and building credit. Tell me more about what you mean by that.
Tony Umholtz: So when we say building credit, we essentially are using other types of forms — like for example, you might have paid auto insurance, right, or utility bills, or rent. We’re able to pull some of these other types of elements of payment history together to show responsibility and the ability to repay. So those are some of the things that we’ll actually use to build the credit history as well as we suggest to get a credit card or something to that effect to — depending on their timing and when they want to buy to start developing that so they can at least get a score. But having a score is pretty critical to get the best loans, you know. Really the only one that we have out there is FHA that will allow us to work without a credit score.
Tim Ulbrich: Got you. Another common mistake I’ve heard you mention is, you know, folks that might have purchased an appliance, piece of furniture, there’s several examples of this, on a 0% interest card and not realized the impact that that might have when they’re going through the lending process and purchasing a home. Tell us more about that.
Tony Umholtz: You know, this is another one, Tim, that I learned firsthand personally when I was young and lots of my — I’ve seen it many times over the years with my clients, but you know, I’ll give the example of buying furniture. Fortunately, I did this after I bought my home. I was 25 I think at the time. It was a long time ago. But essentially, I went into a furniture store, was able to buy all this furniture, and they said, “Hey, by the way, that $4,800 in furniture, we’ll give you a credit card where you don’t have to pay interest for over a year.” I said, “Well, that sounds great. Let’s do it.” And you won’t have to make payments for over a year. Well, unfortunately, how those credit cards work — and they’re in all sorts of retail goods. It’s not just furniture. There’s a lot of different promotions out there. It reports to the bureaus as a maxed-out credit card. So you know, a lot of electronics companies are the same way. They’ll offer this to you. And you’ve just got to beware because it’ll report to the bureaus as a maxed-out credit card. And as we discussed, 30% of our weighting of our credit score is based upon credit utilization. If we show a maxed-out credit card, that’s going to be a big hit to our score. And I see that a lot. It’s unfortunate. But it comes up a lot.
Tim Ulbrich: And you taught me that, Tony. I did not know that that was often viewed as a maxed-out credit card. So obviously what we just learned about FICO and utilization, that makes a whole lot of sense of the impact that that could have. So we talked about no or limited credit history, we talked about buying an appliance or piece of furniture or something like that on a 0% card. The other thing I’ve heard you mention several times — and I think we’re seeing more and more as folks are using more of these tools — would be relying on a third-party credit app or tool, whether it be something like CreditKarma, CreditSesame, when we’re relying on that for credit score information that may not match up necessarily with what you’re seeing on the lending side. Is that correct?
Tony Umholtz: That’s right, Tim. Yeah. That’s right. And I think this is an important topic because there’s a lot of variables out there. And I don’t want to say that these like a CreditKarma and some of the other apps and trackers aren’t legitimate and helpful. They certainly are. And they give you a good idea of the trend of your credit score and how you’re performing. The one thing I would caution everyone on, though, is it’s not typically indicative of what your score is to a creditor. Now, mortgage companies in particular, we run what’s called a tri-merge report, which is all three bureaus. So we’re going to see Equifax, Experian, and Transunion’s, each of them give us a score, provide us a score. And we take the median score. So mortgage lenders take the media score where — and the same thing would apply for like a commercial loan if you’re getting commercial loan for a building or something of substance. An auto company, if you’re buying a car, will often just pull one. So they may just pull Experian, right? Or Equifax. So you know, a lot of times there is a little bit of variability in our scores. And they can be different. Our Equifax score could be potentially be 750, our Experian could be 739, and our Transunion might be 730. Well in that case, you’re at 739, not over 740. And that’s where I see the mistake come up because a lot of these trackers will show you a score that’s a little higher than what we would see. And a lot of my customers send me — my clients will say, “Hey, here’s my report, here’s my credit score.” And it’s oftentimes a lot different than what we pull. But I think there’s a lot coming on scores over the next couple years. I think you’ll see different ways of risk assessment. It hasn’t hit us yet, but I think rental performance will come into play more too. It’s important to always pay our rents on time. You know, traditionally that didn’t always come up on reports. But I think there’s going to be some other elements that are going to potentially help us. And I think you’ll see that the medical collections take less weight on the reports. We’re already seeing that too, which is really a blessing for a lot of people that have had things happen.
Tim Ulbrich: Tony, I can see this playing out. You know, you gave a good example where somebody might be on that line, let’s say a 740, and they think because of what they see on CreditKarma or CreditSesame that they’re going to be above that and then come to find out that they’re not, and that obviously can have a surprise and be an impact on rates. And you know, I’m sure — it reminds me of the patient that might walk through the doors of the pharmacy and be upset with the pharmacist because of what they get through claims adjudication on the insurance side. And the pharmacist is often not deciding that price, but the reality is they’re the person that’s in front of the patient. And I suspect here, that can be much of the same where they may be surprised and take it out on you guys sometimes.
Tony Umholtz: It happens.
Tim Ulbrich: It happens, right?
Tony Umholtz: We’re the messenger.
Tim Ulbrich: Yeah. It’s an emotional process.
Tony Umholtz: It is. One thing that we find that’s been helping too is we have a tool as part of our platform here that can actually tell — we can see what credit — what the scoring potential for a client based upon activities they could do to their report such as paying down debt, consolidating a card or whatever it might be. So it actually — we are able to a lot of times add some value to help people get their scores a little higher. We’ve had a lot of success with that.
Tim Ulbrich: The next one I have here, Tony, is borrowers that may not be checking their credit reports and therefore identifying and correcting any errors that could lead to higher rates. And this one is really something that I find interesting. You know, I do an activity in a personal finance course that I teach where I have folks actually go out, pull their credit reports, analyze them, and then they write a reflection on kind of what they learned. And the trends I have found is that about 50% of the students No. 1, have never checked credit before, have never run a credit report. And then the number of folks that are surprised by what they find on that credit report. So any insights here, even any examples that come to mind of where this can be problematic, especially when you’re in the midst of trying to secure a loan and secure a loan at the best rate?
Tony Umholtz: I think it’s really important for everyone to take advantage of the free credit reports that are out there. You know, the annualcreditreport.com. You’re allowed to have one copy from each bureau per year. And I think that’s something that we all need to do. And the surprises I think are hey, I thought I canceled that credit card years ago, right? And sometimes having open credit — it doesn’t hurt you. But you may not want to have a whole bunch of things out there just from a fraud risk potential. But — and making sure that you’re not attached to things you don’t want to be attached to. You just — in this day and age, you never know, and especially if you get into partnerships and cosigning and things like that, you’ve got to be really careful about what you’re attached to and knowing what entities your credit, you’re attached to. That’s one thing I would just caution because I’ve seen some problems come up with cosigning and people not being aware that they did or applications from everything from student loans to auto loans to business loans. And then just there is a lot of fraud out there, you know? And I think that I’m on LifeLock. I’m not trying to promote anything, I just, I’ve put that on me and my wife’s accounts just so we know what’s going on, right, in case anything ever were to happen we’d be made aware. But certainly would encourage everyone to do that. And you know, I think just knowing what’s out there. I know when I did it one time, I had a credit card that I hadn’t used in like 6-7 years and it was still open, right? If you don’t use it, might want to close it.
Tim Ulbrich: And I’m glad you mentioned the cosigner because I do think that’s something that we hear and see often from the community, whether that’s student loans, whether that’s auto loans, whatever be the situation, obviously there’s a potential risk there of late payments, somebody may or may not be aware of that and the impact that that could have during the credit and obviously impact that could have on your credit and then the surprise that could present during the lending process. Tony, last one I want to talk about here before we wrap up by talking about the pharmacist home loan product is applying for credit before sale is final. And I think many of us who have gone through this process, we’ve gotten the advice of, do as little as you can in terms of new credit or inquiries or anything during this process. But give us some more details, not only why is this important but what is the time period that we should be thinking about this because I sense that there are listeners out there that might be buying a home and also be thinking about refinancing their loans, for example.
Tony Umholtz: Right. And this one is really important, guys, if you’re in process for a home loan because us lenders, we know what you’ve applied for during the process. We’re notified if you secure a new loan. So for example, one that comes up a lot is a new auto loan, a — furniture for the home. I’ve seen that quite a bit. And a lot of our clients are proactive and ask the question first. And we will look and see. If it’s something like hey, my car absolutely won’t work anymore, I need to get a new one, we’ll look and see, will that impact you. We’ll include that new payment into your numbers so it doesn’t affect your home closing. But normally, you want to try to postpone any activity, new credit, when you’re in the mortgage process until after you close just because there’s a lot of risk there, right? It’s a big transaction. You do not want to jeopardize it with new credit because we do know about it. We will know. We are notified if you open anything up. And that’s a really important point if you’re in the process. So I would just caution everyone to be very careful with that. And I will give the classic example. Before they tracked, this is going back probably 2005, I remember I went to this closing for a client of mine, and it was a fairly nice home. And he goes, “Hey, Tony, look at my new car I bought last week!” And the guy had bought a new Porsche, right? This is before we had the trackers. I’m like, don’t tell me this. Oh, don’t tell me that. But anyway, nowadays, we do know what activity has happened. And be very careful. And if you have to do something, just speak to your lender first before you officially apply for any other types of credit during the process.
Tim Ulbrich: Yeah, and that’s where my mind was going, Tony, just knowing the examples that might come here, right? It could be credit, we talked about some of these already, furniture, appliances, student loans, auto loans. Like there’s a lot of things that could come up here, and I think just open communication with the lender if you have questions to make sure that you’re not doing anything that’s going to jeopardize obviously, again, the goal here being that we get the best loan at the best term, you know, and ultimately the best rate so that we can keep the cost of interest low throughout the life of the loan. So Tony, we’ve talked about the makeup of the FICO score, understanding what feeds into that score. We talked about the impact that that could have on someone’s rate and their ability to secure that competitive rate. We talked about some of the common mistakes that you see folks making around credit in the home buying. And I think this is a good connection to the pharmacist home loan product. And I know many of our community members are familiar with this from previous episodes, information we have on the website, but for folks that are hearing this for the first time, give us some more information about the pharmacist home loan, what is it, how it’s different from other options that are out there in terms of down payment, PMI, minimum credit scores, and so forth.
Tony Umholtz: Sure. I mean, again, just a great tool for pharmacists to purchase a home. And the main points of it is you’re able to buy a home — if you’re a first-time home buyer, you could put down as little as 3% and have no PMI. And if you’ve owned a home before, it’s 5% down with no PMI. And that’s significant savings not having the MI but also the interest rates tend to be better than I can offer with a 20% down normal conventional loan for someone else, which is quite a nice opportunity for people. And the minimum credit score is 700. So it doesn’t have like a super high credit threshold. And it’s flexible on reserves and things like that. You know, some programs have very strict reserve requirements, and this one has some flexibility there, has some flexibility on how we value student loans, and you don’t have to be — you know, one of the other things that a lot of doctor loan programs have out there is some of them have restrictions if you’ve been out of residency for 10 years, you can’t use the product. This one does not have those limitations. So it’s — it’s been a great tool for a lot of people. And we’re very pleased that we can offer it.
Tim Ulbrich: And we’ll put Tony’s contact information in the show notes for folks that want to reach out to Tony directly. Also, if you haven’t already done so, make sure to check out — we’ve got a great comprehensive post, very informational, that I think you’ll find helpful, “Five Steps to Getting a Home Loan.” And you can — in that blog post, which we’ll link to in the show notes — learn more about the pharmacist home loan product. We’ve got some calculators there as well. And that’s available at YourFinancialPharmacist.com/home-loan. Again, that’s “Five Steps to Getting a Home Loan” at YourFinancialPharmacist.com/home-loan. Tony, as always, appreciate your insights, your expertise in this area, and thank you for the time coming on the show.
Tony Umholtz: Hey, Tim, thanks for having me. It was great to be here.
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