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Perhaps the most important element of obtaining a
good rate on your mortgage is your credit history. This section is
designed to help you assess your possible credit rating and what type of
terms you can expect from a lender.
Mortgage
When you apply for a mortgage loan from a lender,
broker or private investor the most important
factor is your credit. In some cases it is
only
your credit that determines your ability to obtain a mortgage
loan. There are other factors but credit is by far the most
critical factor that both determines whether you will get a mortgage loan
and at what rate of interest you will get the mortgage loan at. The better
your credit rating the better you mortgage loan rate will be.
Before You Go Shopping
If you plan to "shop around" for a mortgage I
advise that you take the time to order your credit report from all three
credit reporting agencies, and distribute them to the lenders you wish to
"shop" with. I advise this because each time a potential lender pulls your
credit, your FICO Score goes down. In
some instances this can mean the difference between qualifying for a
conventional mortgage (at good rates) and a non-conventional at rates less
favorable.
The three major credit reporting agencies are:
- Experian - PO Box 2104 - Allen, TX 75013
1-800-682-7654
- TransUnion - PO Box 390 - Springfield, PA
1-800-916-8800
- Equifax - PO Box 105873 - Atlanta, GA
1-800-685-1111
General Guide to Credit Ratings
This is a general guide to what is called
"A-B-C-D" credit. These grades are typical of the requirements used by
many lenders, but are not absolute grades. Individual lenders typically
have similar but somewhat different specifications. Keep in mind
that late payments, called "lates", are generally tracked within the
previous 12-month period.
-
"A" Credit
Considered the best credit rating.
FICO Scores are generally 620 and up with
no lates on mortgage and no more than one 30-days-late on revolving or
installment credit. No bankruptcy within past 2-10 years.
Maximum debt ratio is 36-40% while maximum loan-to-value ratio is
95-100%. This type of credit will demand the best interest
rate available!
-
"B+" to "B-"
General good credit with
FICO Scores from 581 - 619. Two or three 30-days-late on
mortgage and two to four 30-days-late on revolving or installment
credit. Cannot have any 60 day lates. Must be 2-4 years
since bankruptcy discharge. Maximum debt ratio averages 45-50%
while maximum loan-to-value ratio is 90-95%. This type of credit will
obtain rates 1-2% higher than current market rate.
-
"C+" to "C-"
Fair credit with
FICO Scores from 551-580. Three to four 30-days-late on
mortgage are allowed. Installment or revolving credit can have four to
six 30-days-late or two to four 60-days-late. Must have 1-2 years
since bankruptcy discharge. Maximum debt ratio runs around 55%
with maximum loan-to-value ratio averaging 80-90%. This type of credit
will generate rates 3-4% higher than current market.
-
"D+" to "D-"
Overall poor credit history with
FICO Scores from 550 and lower. Two
to six 30-days-late on mortgage or one to two 60-days-late, with
isolated 90 days late. Revolving and installment lates show poor
payment record with pattern of late payments. Possible current
bankruptcy or foreclosure allowed with all unpaid judgments to be paid
with loan proceeds. Must have stable employment. Maximum
debt ratio averages 60% with max loan-to-value of 70-80%. This
type of credit will result in high interest rates (12-14%), but borrower
can always refinance after one year of "on-time" mortgage payments to
bring rate down.
Please keep in mind these are "general"
guidelines. Some lenders assign different grades or use different
grade definitions based upon their own method of evaluation.
Always remember to check your credit report for
errors once a year! It is estimated that 50% of all credit reports contain
errors significant enough for an individual to be denied a loan!
What is a FICO Score?
A FICO score is a credit score
developed by Fair Isaac & Co. Credit scoring is a method of
determining the likelihood that credit users will pay their bills.
Fair, Isaac began its pioneering work with credit scoring in the
late 1950s and, since then, scoring has become widely accepted by
lenders as a reliable means of credit evaluation. A credit score
attempts to condense a borrowers credit history into a single
number. Fair, Isaac & Co. and the credit bureaus do not reveal how
these scores are computed. The Federal Trade Commission has ruled
this to be acceptable.
Credit scores are calculated by using
scoring models and mathematical tables that assign points for
different pieces of information which best predict future credit
performance. Developing these models involves studying how
thousands, even millions, of people have used credit. Score-model
developers find predictive factors in the data that have proven to
indicate future credit performance. Models can be developed from
different sources of data. Credit-bureau models are developed from
information in consumer credit-bureau reports.
Credit scores analyze a borrower's
credit history considering numerous factors such as:
- Late payments
- The amount of time credit has been
established
- The amount of credit used versus
the amount of credit available
- Length of time at present
residence
- Employment history
- Negative credit information such
as bankruptcies, charge-offs, collections, etc.
There are really three FICO scores
computed by data provided by each of the three bureaus––Experian,
Trans Union and Equifax. Some lenders use one of these three scores,
while other lenders may use the middle score.
Frequently Asked Questions (FAQs)
How can I increase my
score? While it is difficult to increase
your score over the short run, here are some tips to increase your
score over a period of time.
- Pay your bills on time. Late
payments and collections can have a serious impact on your score.
- Do not apply for credit
frequently. Having a large number of inquiries on your credit
report can worsen your score.
- Reduce your credit-card balances.
If you are "maxed" out on your credit cards, this will affect your
credit score negatively.
- If you have limited credit, obtain
additional credit. Not having sufficient credit can negatively
impact your score.
What if
there is an error on my credit report? If
you see an error on your report, report it to the credit bureau. The
three major bureaus in the U.S., Equifax (1-800-685-1111), Trans
Union (1-800-916-8800) and Experian (1-888-397-3742) all have
procedures for correcting information promptly. Alternatively, your
mortgage company may help you correct this problem as well.
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