How Your Credit Score Affects Your Mortgage Rate

Credit checks are a necessary part of applying for any loan, but they are especially important during two stages of the loan process: on the day you apply for a mortgage and shortly before closing on the loan. The first credit check is to ensure that you pay your bills on time and have sufficient income to purchase the property. The last credit check before closing is the lender's last assurance that you are, indeed, creditworthy.

Knowing what lenders look for on your credit report and in your FICO® score is important information and can help you prepare to get the best mortgage possible.

Mortgage Lenders

Mortgage lenders take your credit score very seriously. Even though studies show that applicants with high FICO® (Fair Isaac Corporation) scores are more likely to strategically default on a mortgage loan (walk away from it), applicants with low scores are still considered a greater risk by lenders.

Generally, the better your score, the more options you have. You'll be able to buy with a lower down payment, access a wider variety of loan types, and pay fewer points for a lower mortgage interest rate.

Good Score? Lower Mortgage Interest Rate

How much lower will your interest rates be if you have a good credit score? This will vary from individual to individual.

Keep in mind that the FICO® scoring range runs from 300 to 850. Let's say you're applying for a 30-year mortgage and your FICO® score is 760, which is a very good score. Your interest rate may be among the lowest on the market.

Now, let's assume your FICO® score is quite a bit lower: only 620. Suddenly your interest rate is dramatically higher. If your score falls between 500 and 520, you will have much higher interest rates and you'll find fewer lenders willing to work with you.

Borrowers with scores between 300 and 500 are generally not considered creditworthy. If you're interested in learning more about how your score impacts the interest rate on your new mortgage loan, see the chart at MyFico.com.

My Score was Fine. Why Wasn't I Approved?

Even with a sterling FICO® score, you may still be turned down for a mortgage loan. If you are unemployed or have been within the past two years, you may not be approved for a loan. If you don't make enough money to cover the monthly payments, you may be denied a loan. There are any number of reasons a lender may not want to work with you, even with a high FICO® score.

Credit Checks and Life

Your financial history will not only affect your chances of buying a house, but may impact your ability to receive financing for a car, a vacation or for home renovations.

Insurance rates may also be affected by your rating, as poor ratings usually mean higher premiums. Many colleges will consider your financial history before they approve student assistance programs. Even employment may be affected, as many employers require a credit check as a character reference before offering a position.

Service and information provided by Katie Oakes with Keller Williams Premiere Properties. Visit WheatonHomes4Sale.com to start your home search today or just begin looking at homes that are currently for sale in your area!

Buying a Home? Knowing Your Credit Score is the First Step

If you have questions about getting a mortgage or just want more information please email me at KatieOakes@KW.com and I will supply you with a list of known reputable lenders that work in your area.  Feel free to check out my website which has information on the home buying and selling process and has access to every home listed for sale in the Chicagoland area.
Knowing your credit score can help you estimate what kind of borrowing situation you will be faced with if you are looking to buy a home in the near future.  Lenders are much more likely to lend money to borrowers that can prove they have a good history of repayment.  Credit scores, which can range from 300 to 850, are based on a number of factors but primarily come down to how well you pay off your bills.  If you find that your credit score is below average try paying down your debt while minimizing purchases put on credit.  Also try diversifying your credit by signing up for a few store credit cards at your favorite shops, but make sure to keep the purchases minimal and within your ability to pay off immediately. The number one rule for keeping your credit score low is to never spend more than what you have, although it is important to have credit usage it is equally as important to pay off your debt as soon as possible.  Below is a list of credit score ranges and what lenders view those scores at.

760 or higher: Excellent. Your score is well above the average score of U.S. consumers and clearly demonstrates to lenders that you are an exceptional borrower.

725 to 759: Very good. Your score is above average and demonstrates to lenders that you are a very dependable borrower.

660 to 724: Good. Your score is near the average. Most lenders consider this a good score.

560 to 659: Not good. Your score is below the average. Some lenders will approve loans with this score.

Lower than 560: Bad. Your score is well below the average and demonstrates to lenders you are a very risky borrower.


SOURCE: Scoreinfo.org