Mortgage Loan Financing: Credit Scores

09Nov2011
Author:
Scott Sheldon
Contact Scott

As you probably know, mortgage loan financing requires acceptable credit scores in order to close a home loan. There is so much information out there with regards to credit scores and what makes up the actual credit score, it can be very overwhelming. In order to get a mortgage loan, you need to have a minimum credit score of 620 for conventional loan financing. All other mortgage loan programs require a minimum middle credit score of 640.

For the best mortgage loan financing, make sure your credit scores have a clean credit profile.

Here's a little history about credit scoring with records to getting a home loan. Credit scoring was originally designed to provide mortgage lenders with information on consumers' bill paying history and whether or not there was an ability to repay the mortgage.

The reason why your credit score is so important is because it provides the most accurate picture for a creditor to determine how likely you are to be late on a debt obligation. It seeks to quantify the probability of a delinquency within the next 30 days. This is why when us mortgage lenders pull a copy of a credit report, it's an accurate depiction of the credit score 30 days ago.

Here are the five factors that make up a credit score.

1. Payment History-35% impact on the credit score

This involves simply paying debts on time and in full and has the highest impact on your credit score. Late payments, collections, judgments, charge-offs all pull a credit score down. In fact nothing will make your credit score go up or down like a mortgage loan will.

2. High Credit Balances-30% impact on the credit score

The magic factor is to make sure that your credit card balances at any given point in time are no more than 30% of the total allowable credit line. That means if you have a credit card with $1,000 credit line you don't want the balance on that account to ever exceed $300. Ideally, you should make an effort to keep credit card balances as low as possible or even at zero.

3. Credit History-15% impact on the credit score

This represents the amount of time that credit has been established for. The longer the credit has been open for, the more positive reflection on the credit scores.

4. Credit Types-10% impact on the credit score

The goal here is to have a mix of credit accounts. That means a combination of auto loans, credit cards and mortgages looks a lot better to the credit bureaus than credit cards only. Diversify your credit accounts. This doesn't necessarily mean run out and get an auto loan, it just means having a mix of different credit types is a positive for a healthy credit rating.

4. Inquiries-10% impact on the credit score

Multiple credit inquiries over time from different creditor to types within a six-month period can make the credit score drop. If you are shopping for a mortgage loan, you can have your credit run multiple times in a 30 day period and not have any adverse credit rating.

Credit scores can affect your mortgage loan financing in the form of a higher interest rate.

Since your credit score is an indicator of how likely you are to repay your mortgage, lenders look at the range of credit scores which are realistically between 500 and 800 and a price out the mortgage loan according to your credit score. The higher the credit score the better the interest rate, the lower the credit score, the higher the interest rate.

A borrower who successfully increases their credit score from 600 to 710 can easily save up to $500 per month on a new home loan. This also represents tremendous interest savings over the life of the 30 year term.

Mortgage lenders look at three different credit scores. It's called a tri-merge credit report and it's the most accurate credit information available. Mortgage lenders look at Trans Union, Equifax & Experian and they use the middle score from each of the three credit reporting agencies.

*Remember a mortgage loan credit report is the most accurate credit report. A true credit report has the full credit history, all three credit scores, as well as a list and schedule of all creditors with their contact information. This means the credit report you get at the auto loan dealer is not the same as the mortgage you obtain through a mortgage lender. The auto loan credit report is Beacon Score, which is not a true measure of your credit scores.

So what happens if there's problems with the credit scores?

The first thing to do is to make sure your credit score is between 620 and 640 in order to procure mortgage loan financing. If it's not, you have options for remedying the negatives to improve your credit score rating.

Following is a list of such actions:

  • Talk to your mortgage lender about a credit repair company-most these days are quite flexible and effective
  • Contact the creditors yourself and ask them to correct their credit report-most of the time they will need concrete information to do this

Here are some tips to maintaining good credit scores while obtaining mortgage loan financing.

  • Do not go out and make any large purchases with credit of any kind-for that matter do not make any large purchases of money in the bank either wait till your transaction has closed.
  • Do not pay off collections or old delinquent credit cards or charge-offs
  • Do not close credit cards during the transaction or at all-simply don't use them
  • Do not max out credit cards
  • Do not consolidate or transfer credit card balances from one card to another
  • Do not cosign on someone else's credit account-this means mortgages, auto loans, personal loans, student loans or any credit account
  • Do stay current on all existing credit accounts-a void late payments at all costs especially during escrow
  • Do use your credit cards as you normally would

If you are thinking about taking out a mortgage loan today and have credit challenges let us know scott@sonomacountymortgages.com. If you have challenges associated with your credit scores you can read these posts which discuss the subject matter of credit scoring as well.

Other helpful credit score information:

Why You Don't Need An 800 Credit Score

640 Is The Magic Score For Home Loans

How To Increase Your Credit Score To Get A Mortgage

Short Sale & Foreclosure Credit Choices

What You Must Know About Credit Score For Home Loans

Find Bad Credit Mortgage Loans

Let's talk about mortgage loan financing and how important credit scores are to making sure you get the best possible mortgage.

Browse Q&A

Recent Questions & Answers

Are Credit Reporting Services Accurate For Getting A Mortgage?

No, credit reporting service companies want you to feel like you’re in control of your credit score. Some services even allow you to run statistical tests to see what actions you can take to improve your credit score, but these are by no means a guarantee especially when it comes to obtaining a mortgage.

Let’s say you have a credit score of 610, through a credit reporting company like Experian for example. When you apply for a mortgage, the mortgage lender gets one score per credit bureau. They pull what’s called a tri-merge credit report, comprising all three credit scores, and they use the middle credit score for loan qualifying. Let’s say you’re middle credit score is 600, your high credit score is 609 and your low credit score is 580. Pretty big disparity between the credit scores right?

What Consumers Must Know Regarding Credit Report Subscription Services

Credit reporting subscription services are ideal for  keep a running tally on your credit score. They are by no means, an accurate depiction of what your true credit is like like a financial services credit.

Yes a financial services credit report a lender uses in conjunction with originating a loan is by far more complete, more accurate and more up to date than any other credit report or credit reporting service. Expect a disparity between the lender’s credit report and your credit reporting services subscription, every time.

Are credit reporting company subscriptions worth the cost? The answer is yes if you’re trying to stay up to date on one or more credit bureaus and you’re perhaps in the process of building credit. However, if you’re looking for a mortgage, a credit subscription service is not the benchmark credit credit standard.

Need to check your credit score? Curious about buying a home? Get a free rate quote today!

Should I Be Concerned About A Light Documentation Loan Offer?

Absolutely yes, here’s why… On January 10, 2014, qualified mortgages took shape for the entire mortgage industry mandating lenders specifically document of borrowers ability to repay. Because of of these new regulations, if you receive a mortgage quote offering less the normal documentation such as not needing a pay stub for example if you are a W-2 wager, or only needing one year of income tax returns among others, this should raise questions.

The first question you would want to ask yourself is how is this lender able to do something that others cannot? Mortgage lenders don’t have a monopoly on the market all mortgage money comes from the same place with the exception of folio lenders which are usually local banks and credit unions who have niche products but still have ability to repay requirements which still requires full income documentation.

Following is the traditional list at the minimum, approved lender would request of you when determining whether or not to approve you for a mortgage.

→Two years of tax returns
→Two years of W-2′s
→Thirty-day pay stubs
→Sixty-day bank statements

Additionally, during the loan qualification process it is essential to let the mortgage lender run your credit report. There’s no way for them to issue a credit decision without a credit report in the name of the lender whom you are applying with. Credit reports are not transferable amongst lenders.

Beginning The Loan Process

Put together the financials, apply with a lender, allow to obtain your credit report. Doing this will allow you to accomplish your main objective which is to determine whether or not the figures are affordable in alignment with your goals and expectations.

Need a mortgage? Start by receiving a fast mortgage rate quote to purchase or refinance a home, it’s free!

 

How To Document A Foreclosure, Short Sale Or Bankruptcy For Mortgage Lending

Getting a mortgage after foreclosure, short sale, or bankruptcy, or even a combination of the two is absolutely doable. However depending on the credit circumstance different documents could be needed for properly documenting the previous  derogatory credit item.

Here’s how to properly document any one of the big three credit issues

Foreclosure- can be documented with the trustee’s sale date deed. Lender will use the latest date stamped on the trustees sale date deed. 3 year window  using an FHA insured loan, seven years on a conventional loan.

Short sale-can be documented with the grant deed deeding the property from you the seller to the new buyer. Lender will go by  the most recent date stamped on the grant deed as well. 3 year window using an FHA insured loan, seven years on a conventional loan unless 80% loan to value or lower

Bankruptcy-full bankruptcy discharge papers including the schedule of creditors from the most recent discharge date.  Lender will go by the discharge date. 4 Year window using an FHA insured loan, four years on a conventional loan.

Most mortgage professionals have a relationship with a particular title company who can who can obtain the information necessary directly from county records making the process dramatically easier.

If  you would like to qualify for a mortgage to purchase or refinance a home, start by contacting Scott [Email address: scott@sonomacountymortgages.comScott #AT# sonomacountymortgages.com - replace #AT# with @ ]!

Can I buy a house 1 year after a short sale?

Yes under the FHA Second Chance Program. The program allows a home buyer to repurchase just 12 months after a foreclosure or short sale. In order to qualify, there must be a documentable loss of income for a minimum of six months and/or supporting documentation showing a one time unforeseen economic hardship that resulted in loss of income for a minimum of half a year. This is a non-negotiable aspect of the program. In other words, without supporting documentation such as an employer letter, lower income and pay stubs and/or lower income on tax returns, most buyers will not qualify.

If documentation cannot be provided that supports the loss of income claim, 20% down is required to purchase a home again for a primary residence two years in a short sale for a conventional mortgage loan without monthly mortgage insurance. Otherwise, an FHA Loan will allow for the regular three-year window outside of a foreclosure or short sale.

How to document the short sale or foreclosure when it comes time to get a mortgage

If the previous property was a foreclosure, the new mortgage lender putting together the loan will need a copy of the trustee’s deed stating specifically when the foreclosure was recorded.

If the previous property was a short sale, two things would be helpful to have, the final settlement statement also called the HUD one that you would’ve received from the title company handling the sale and a copy of the grant deed-deeding the property from you to the old buyers. This document will also be in the title papers provided by the title company at commencement of the previous sale.

Lending Top: A quality lender can access these  documents from their preferred escrow officer.

Having a hard time determining whether not you will qualify to buy a house again? Give Scott a call at 707-217-4000 or send him an e-mail scott [Email address: scott@sonomacountymortgages.comscott #AT# sonomacountymortgages.com - replace #AT# with @ ]. He can walk you through the nuts and bolts of qualifying and make sure your new loan will successfully close escrow.

Why Is My Mortgage Rate On My New Loan So High?

In short risk-based pricing, the higher the risk the lender incurs the higher the mortgage rate you will be quoted on the new mortgage. This  is especially true with conventional mortgages, not so much on the FHA variety. FHA unlike conventional loans does not discriminate to the degree conventional does based upon credit score.

Following credit score ranges are indicative of  risk-based pricing on conventional loans…

620- 639 – highest mortgage rate/ pricing

640-679-  higher mortgage rates and pricing although not as high  as a score between 620-639

680- 700- pricing continues to improve as does mortgage rate

700-725- substantially  lower priced mortgage

740-760- best priced mortgage rate and/or cost

The other factor influencing mortgage rate besides credit score is of course loan-to-value. The higher the loan-to-value, yep  you guessed right, the higher the interest rate. The  lowest and best possible mortgage rates and terms  are awarded to consumers whose credit scores were 740 or higher and have it least 30% equity in their home on single-family primary residence transactions. That’s  not to say  if you don’t meet that criteria you will not get a competitive interest rate,  but expect the pricing to be different than if you met the major linchpin criteria.

If  You have a mortgage scenario we can give you an accurate rate quote on, send us your loan data, we will respond fast with accurate rates and terms.