Applying for a mortgage requires that the lender runs a credit check to view your previous credit history. They will also obtain your FICO credit score to determine your eligibility for a mortgage loan. A mortgage loan is typically the biggest investment a borrower will make in their lifetime, so it is financially wise to come to the lender with the best credit profile possible when you are ready to apply for your loan (Read Credit Score Needed to Get a Mortgage).
What Lenders Are Looking For
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A FICO score is the three digit credit score devised by the Fair Isaac Corporation and is calculated using a complex algorithm based on how you have handled your finances over the years. Lenders use this score as a first-glance diagnostic for determining your credit worthiness. Higher credit scores (620 -850) indicate less lending risk, and low credit scores (below 620) indicate the possibility of default in the eyes of the lender. In addition to a credit score and history report, lenders also take into consideration other aspects of the applicant including income, job history, loan amount needed, and other financial obligations of the borrower.
Mortgage Lender Made Less Risky
Since the mortgage industry meltdown occurred, more lenders are placing stricter credit requirements on borrowers when deciding loan approvals. Most lenders now look for scores of 650 or higher before approving the loan. Borrowers with credit scores of 730 or higher will be more likely to get the lowest interest rates and better loan terms. Those who have scores between 650 and 730 can still get approval but the terms will be stricter and the interest rate will not be the lowest available. Scores that go below 620 are generally considered to be sub-prime by lenders, meaning that the risk of the borrower defaulting on the loan is the greatest. For low scoring borrowers, interest rates will be much higher than typical and other requirements such as a higher down payment on the home purchase will likely be required.
Borrower Options for Bad Credit
Borrowers who have a poor credit history such as those that include a bankruptcy or previous mortgage default may not be eligible for a mortgage loan at all until their credit standing and score improves. However, there are different types of lenders that allow consumers who have endured financial hardships eligibility for some loan programs. Government programs and specific lenders often have more options for consumers with credit scores on the lowest end of the spectrum.
It is advisable to improve your credit score long before applying for a mortgage in order to gain the most leverage with the lender. The higher your credit score and the more stable your credit history is, the better interest rate you will be awarded. Lower interest rates mean more savings for the buyer over the life of the mortgage loan. It is important for the borrower to remember that time is a large factor in the improvement over credit. There are no quick-fixes for credit repair.
Review your credit score and history well in advance of your loan application and dispute inaccurate information. Once you focus your efforts on improving your credit profile, you can make a significant difference in your credit score and the overall amount you end up paying for your mortgage loan.