Boosting your FICO credit score as a pathway to a lower mortgage payment is easier than you might think.

Hopefully, the tips in this column will help you.

First, a brief explanation of a FICO credit score. The three-digit number reflects a person’s credit worthiness and debt default risk. Scores range from 300 to 850, with 850 being perfect credit and 300 being the worst possible credit.

If your middle FICO score is 740 or higher, that’s great. If the borrower enjoys a score of 800 or more, I always tell them they are next to God.

Also see: California home sales tumble below Great Recession low for 21 months

Weighting or calculating of the score is based on payment history (35%), amount of credit (30%), credit history (15%), and credit inquires and new credit accounts (10%).

Each person with enough established credit has three scores, one from each of the three major credit bureaus: Experian, Transunion and Equifax. The lowest middle-FICO score of all borrower applicants is typically the score lenders use.

Mortgage lenders price home loans based, in part, on a matrix that includes the percentage of down payment or percentage of equity (when refinancing) and the lowest middle-FICO score of all borrowers. The higher the score and the more down payment, the better the pricing.

For example, let’s say you were paying $1 million for a home and putting 20% down, which means a loan amount of $800,000. With a 740 middle-FICO your rate would be 6.5% with a principal and interest payment of $5,057.

In the same scenario with a 640 middle-FICO score, the rate would be 6.875% with a $5,255 monthly principal and interest payment. The monthly payment difference is $198.

Multiply that by 360 payments or 30-years, you would be paying $71,280 more if your score was 640. It really does pay to boost lower credit scores.

Something else to note: One point can make the difference between approval and denial. If your middle FICO score is 619, you will be denied for a conventional loan because the minimum required FICO is 620.

First and foremost, find out your middle-FICO credit score. Your mortgage loan originator can run your credit and get the scores. Credit reports have become crazy expensive. Some lenders absorb the cost of the credit report. Many pass the cost to the consumer. More or less, you can expect to pay $100 for a credit report with scores.

Your mortgage loan originator should have access to a score navigator or simulator. That’s a fast way to find out what’s possible in terms of raising your scores if you, for example, pay a bill off or pay it down.

Once you complete the tasks to boost your score, it gets raised by a process called rapid rescoring, and that’s an expensive process. You, as the consumer, are prohibited from paying for this. Your lender must absorb the cost, which might be $40 per bureau per account, plus the cost of a new credit report.

Increasing the score for one bureau for, say, one credit card account will cost roughly $220 ($40 times three plus $100). It’s the most valuable free service you can get in the mortgage application process.

The following tips to raise your FICO scores come from Mindy Leisure, director of credit education at Advantage Credit. (Full disclosure: my firm does business with Advantage Credit.)

—A medical collection can reduce your score by 100 points. Collection agencies may accept 50 cents on the dollar especially for dated (older) accounts. Contact the collection agency on a Friday afternoon to negotiate the balance and ask for a credit report letter of deletion. If the representative doesn’t play ball with you, ask for a supervisor. Never contact collection agencies on a Monday. People tend to be in a better mood on Friday afternoons, right before the weekend. 

And a note on medical debt: Open collections under $500 are not reported to credit agencies. More than $500 debt is reported but are deleted once paid. A new law that would have eliminated medical debt from credit reports is on hold, pending the new White House administration and lawsuits from the Association of Collection Agencies, according to Leisure.

—If the collection account is nearly seven years old, don’t pay it. It will fall off your credit report at seven years. Your credit score can actually get worse if you pay off a collection without a deletion letter because you get a more current reporting date.

—All credit inquiries from the mortgage industry count as just one inquiry from TransUnion and Equifax, if pulled within 45 days. Experian is just 15 days. So, if you apply around, be sure you do it within 15 days of the first application.

As an aside, an inquiry can hurt your score anywhere from zero to 10 points. The cleaner the original credit, the less the score hit. If you do not take out any credit from that inquiry, any reduced scores will dissipate within six months.

—If you have a $10,000 credit limit for credit card X, and your balance is $5,000, Leisure advises to pay the balance down to 10% of the limit or $1,000. That can be worth a 5-20 point credit score boost. Doing this earns you a better score than paying it off. “Fair Isaac is not fair,” said Leisure.

—If you don’t have the funds to pay a credit card down to 10%, go back to the creditor and ask for the credit limit to be increased.

—Don’t close accounts because you will lose the good scoring credit for history. History is worth 15% of your score.

—Don’t open new accounts unless you must.

Lastly, I advise clients not to spend money on a credit repair company. A good mortgage loan originator can solve whatever is possible to solve and the service is free to you.

Freddie Mac rate news

The 30-year fixed rate averaged 6.76%, 5 basis points lower than last week. The 15-year fixed rate averaged 5.92%, 2 basis points lower than last week.

The Mortgage Bankers Association reported a 4,2% mortgage application decrease compared with one week ago.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $806,500 loan, last year’s payment was $249 more than this week’s payment of $5,236.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.625%, a 15-year conventional at 5.375%, a 30-year conventional at 6.25%, a 15-year conventional high balance at 5.875% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year-high balance conventional at 6.625% and a jumbo 30-year fixed at 6.5%.

Eye-catcher loan program of the week: A 40-year fixed rate mortgage, interest-only for the first 10 years at 6.625% with 1 point cost.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.