Take-Home Points on Credit Scores for Homes (and Mortgages)
- Credit Scores lower than 620 will be hard to get approved for a mortgage
- Most experts believe that a credit score above 720-730 are apt to get the best mortgage rates
- Pointed out that nearly half of all mortgages in the first quarter of 2011 went to borrowers with credit scores above 750
Related Credit Score Guides:
Seeking out a good mortgage rate can be a complicated process, especially in 2012 when lenders are much more stringent with their lending requirements than they once were. Due to the near-collapse of the housing market just a short time ago, most lenders are looking not only for an excellent credit score, but they are also requiring a commitment of larger down payments.
What Lenders Expect From You
Ideally, credit scores that range from 730 and above will allow for the best interest rates on a mortgage. The old score requirements used to be 700 but since there was a meltdown in the mortgage industry,mortgage lenders want to have more security to prevent risks of default. With a score of 730 or higher and a solid track record of good payment history will be important. Lenders also want to see how you have used your available credit. Your mix of account types can be important. Your debt to income ratio will also be key in getting approval.
Lenders also expect you to come up with the cash that equals 20% of the home sales price. There may be some leeway as to how much money you must come up with among lenders but most lenders will want to see a significant upfront payment, especially when your credit is less-than-perfect. For those unable to come up with the total down payment requirement, approval may still be possible but homeowners will have to obtain PMI (private mortgage insurance) until 20% equity has been built up in the home.
For those who have negative marks on their credit reports and a lower score, lenders may still consider approving the mortgage loan but will also likely do so under stricter terms and conditions as well as a higher interest rate. The borrower will also have to come up with the down payment money which may be a higher percentage than the typical 10-20%. Borrowers may also have to go through more red tape as far as documenting their finances and proving their ability to repay the loan amount when there is a risk of default.
Types of Lenders
Keep in mind that there are different types of mortgage lenders. Traditionally, you have the large banks that will likely have the strictest lending policies, requiring the highest credit scores and good credit history in order for a borrower to get approval for loans at the lowest interest rate. There also may be smaller community banks and credit unions that may be more flexible in their lending terms and more willing to provide financing even if your credit history has some marks.
For those who are not able to provide adequate down payment amounts, there are programs through the state and federal government agencies that may provide loan terms that can help low to middle income families that can afford mortgage payments but who do not have the upfront cash necessary. With these programs, the credit score can range from one side of the spectrum to another. There are some mortgage programs available that accept credit scores as low as 600 depending on the other financial information of the potential borrower. Some programs will work with borrowers on based on repayment ability despite a low credit score.
What You Need to Do
While there are programs and loans available for a wide range of people, it is always best to work on improving your credit score well before you apply for a mortgage loan. There are certainly options out there for borrowers who have suffered credit problems in the past but it is to every borrower’s advantage to come to the table with the highest score possible. When your credit is a beneficial part of your overall financial life, you have more options to choose from when exploring mortgage loans. You also will save a lot more money over the lifetime of your loan by securing the lowest interest rates possible.
As soon as you know you may be seeking mortgage financing in the near-future, you should request copies of your credit score and reports to see where you stand. Do not wait until the perspective lender pulls your credit during a loan application. Your chances of being denied a loan if you go into the process blindly is significantly higher than if you go in prepared. Once you have your credit history in your hands, review the information for accuracy and dispute all incorrect information with the credit bureaus directly. Inaccuracy on a credit report can drop your score by several points which can impact your finances negatively.
The only tried and true way to repair your credit score is to make all of your debt obligation payments on time each month consistently. Time is really the only tool you can use to better your credit so if you are considering applying for a mortgage at any point down the road, you need to take a proactive stance on protecting and improving your credit to its best potential.
Ideal Credit Scores
For credit scores ranging from 700-730, there are still options for mortgage lending but interest rates may be higher and terms of the loan stricter than those with better credit scores. When dealing with credit scores below between 650-700, there may be additional red tape for getting approved on a mortgage loan. Lenders will likely want to see more documentation concerning income and ability to repay the loan. They will also charge higher interest rates and fees to help compensate for the potential risk of default.
Those with credit scores below 650 may have a harder time finding a lender to approve a loan. In most cases, low credit score holders should hold off on applying for a loan with a traditional lender until they can sufficiently improve their credit score to above the 700 mark.
Improving Scores for a Better Mortgage
A mortgage is likely the biggest financial investment you’ll make in your lifetime. Since most mortgage range from 15-30 terms, it is in your best interest to improve your credit score to its best possible standing before approaching a lender. Improving a consumer credit score is not difficult but it does take time. If you are even considering buying a home in the near future, it is time to do the work to get your credit score back on track.
Credit scores are based on the way you manage your money, your credit, and your overall financial responsibilities. A low credit score will reflect to the lender that you may not be reliable when it comes to meeting monthly financial obligations. You should start your improvement efforts by making sure that all of your monthly payments are made on time each and every month. By ensuring timely payments, your credit score could start seeing improvements within a few months.
It is also important to order a copy of your credit reports from the three major consumer credit reporting agencies. Review the information contained in the reports for accuracy. Oftentimes, incorrect information on your credit profile will translate to lowered credit scores so it is important to dispute data that is incorrect and have the credit bureau make appropriate changes to each report.
Mortgage lenders are adopting stricter requirements in order to prevent another mortgage crisis from happening. Lenders will work to ensure you are capable of meeting these requirements before agreeing to approve a loan. With the multitude of defaults still occurring in the mortgage industry, mortgage lenders will do everything they can to reduce that risk and therefore a top-notch credit score will be necessary.
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