Lower credit score not always a cause for alarm

Dear Liz: I sold my house, paid off my mortgage and then got a new mortgage for another home in 2021. When I applied for the new mortgage, my credit score was 830. After buying the home, my score dropped to the low 700s. It’s only gone up 2 points in seven months. I have no other debt. What’s going on?

Answer: Remember, you don’t have one credit score, you have many. When you applied for a mortgage, you typically would be shown three older-generation FICO scores, one from each of the three major credit bureaus (Equifax, Experian and Transunion). Your interest rate would have been based on the middle number. If your scores were 840, 830 and 700, for example, your rate would be based on 830. Any score over 740 typically gets the best rate and terms on a mortgage, all else being equal.

The score you’re monitoring now was likely created from a different scoring model. If the score is a FICO score, it likely was created from an updated formula such as FICO 8 or FICO 9. It’s also possible that you’re viewing a Vantagescore 3.0 or 4.0. Vantagescore is a FICO competitor.

If you’ve been monitoring the same score all along and it actually dropped 100 points since your application, then something else is going on. Please check your credit reports from all three bureaus and look for a skipped payment, a collection or some other serious problem.

Parking cash and converting IRAS

Dear Liz: I turned 72 in December and took my first required minimum distribution. With the goal of purchasing property next year, should I put the funds — $6,000 — in my Roth IRA or just put it in my bank savings account? Also, should I convert my traditional IRA to a Roth or just leave it alone.

Answer: To contribute to an IRA or Roth IRA, you must have earned income such as wages, salary or self-employment income. If you don’t have earned income, your contribution would be considered an excess contribution that could incur a 6 percent penalty for each year the money remained in the account.

You don’t have to be working to convert a traditional IRA to a Roth, but there’s typically not much reason to do so at this point unless you intend the money to go to your heirs and want to pay the income taxes rather than have them do so. Even then, you should run this idea past a tax pro or a financial planner since conversions can create other problems, such as higher Medicare premiums.

HELOC or reverse mortgage a good idea?

Dear Liz: Your recommendation that a retired couple consider a home equity line of credit to pay for home repairs astonished me. According to news reports, HELOCS are becoming harder and harder to find. Banks that still offer them have gotten stricter. And to suggest a reverse mortgage for a couple who only needs $10,000, I think, is not the best option for them.

Answer: Lenders did tighten their requirements for HELOCS after the pandemic began, and some stopped offering them entirely. But the situation is starting to ease, thanks to rising levels of home equity and a generally strong economy.

The original letter writer’s spouse had proposed using a low-rate credit card to pay for a new furnace and water heater. Using a lowrate card isn’t a bad option if the balance can be paid off quickly, but could become expensive otherwise. Low rates are typically teaser rates that expire after a certain period. The couple then could try to roll the balance onto another lowrate card, but there’s no guarantee they would be approved for such a balance transfer or that they would get a large enough credit limit.

You’re quite right that a reverse mortgage wouldn’t be a great solution if the couple only needed $10,000, but the original letter writer indicated they had little in savings. A reverse mortgage loan or line of credit could provide an ongoing source of funds for those with few other options.