Mortgage Loan Financing: Credit Scores
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
Other helpful credit score information:
Let's talk about mortgage loan financing and how important credit scores are to making sure you get the best possible mortgage.
Recent Questions & Answers
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.
Collections negatively affect your chances of getting a mortgage loan, but it’s not impossible to be successful on getting approved for a mortgage despite having previous bad debts. When you apply for a mortgage loan, the lender pulls your credit report and will know in 20 seconds what your credit scores are and how any collections will affect the integrity of your qualification.
An old balance with the delinquency long in the past will negatively affect your credit score to some degree even if the account is a few years old and has been closed. The old balance will likely need to be ‘zeroed out’ at close of escrow.
Let’s say for example you owe $500 on old store credit card that’s been closed, but had delinquency’s from a couple of years ago, this account will need to be at zero by close of escrow. Mortgage lenders not going to care specifically the amount you pay to the creditor, it can even be settled, key is to have it zeroed out with no balance by the close of escrow.
Mortgage Tip: usually when the total amount of all collections are $2000 or higher, the accounts have to be zeroed out. If the old accounts are under $2000 typically the accounts can remain as this. This is subject to an automated underwriting engine the lenders use to determine risk analysis upfront when getting preapproved for the mortgage.
If you would like to get pre-qualified for a loan, contact us today!
Yes you do have choices. You do not necessarily have to have a credit score of 640 or higher, but it is helpful. Typically, loans for borrowers from 620-639 cost more in terms of a pricier interest rate them loans for borrowers who have better credit scores. Bottom line, if you have the income to offset the liability, and you can qualify for financing, the credit score you need to buy house is 620.
Two Program With This Credit Score
FHA: only requires a down payment of 3.5% and the seller can pay up to 6% of the closing costs on the home purchase. Eyeing a house online for $350,000? You’ll need a down payment of at least $12,250. More often than not the down payment comes from a retirement account such as an IRA or employer paid 401(k). If you been working at your job the last couple of months, high chance your 401(k) has funds available for a down payment..
Conventional: requires a minimum down payment of 5% and seller can pay up to 6% of the closing costs associated with the home purchase. However, because of the inherently higher costs associated with this type of loan, best to have 20% down or it least 15% down. Here’s why the interest rate and costs associated with financing on a conventional loan with this type of credit score make the loan very pricey. In other words, in most cases loans in this bucket are going to hit the federal 1.5% high cost loan level making the loan potentially an fundable with less than 20% down using conventional financing. The only way to reduce the higher annual percentage rate is to increase the down payment and/or reduce the purchase price, with most weight being given to reducing the loan amount ( i.e. increasing down payment).
Do you need a higher credit score to buy a house? No, but it will cost you
Be prepared on average to pay it least .5% higher in rate than if your credit score was say 700 or higher especially on the conventional loan side. FHA loans also have a risk-based pricing premium which is the higher premium for the increased risk, lower credit score, but the effects with an FHA loan are more minimal than on a conventional loan. It’s unlikely using an FHA loan you’d run into high cost loan issues whereas the conventional side it’s almost guaranteed with less than 20% down.
If you’re looking to buy house in Santa Rosa or the California market, we can help start today by getting a complementary loan pre-qualification so we can better understand how to best structure your pre-approval.
Yes, having a cosigner in most situations does help you qualify for a mortgage as long as the cosigner has additional income used to offset the new housing payment liability. Check out our earlier post about cosigning on a mortgage.
Consumers seeking to qualify for mortgage loan financing can use the benefit of someone else’s income to help them purchase a home or refinance a mortgage. 95% of the time it’s used on purchase money financing, but definitely can be used on refinance scenarios as well.
Cosigning allows a consumer increase the amount of debt they’re looking to apply for because larger income from the cosigning party is used to help qualify the primary borrower. A lender will look at a full credit application of the primary borrower and a full credit application on the cosigner, secondary borrower.
How A Mortgage Lender Breaks Down Income & Liabilities On Co-Signor Transaction
Total current income, less minimum monthly liabilities = total new housing payment allowance.
More specifically, a lender will typically take 45% of the gross monthly income, less monthly liabilities, and the net amount of these figures will provide the total new house payment amounts. Same exact situation on a cosigning situation.
A cosigner is:
- permanently on the application with the primary borrower
- cannot get off the obligation unless the debt is paid of via a refinance, or selling of the property or assumption of the loan if the loan is assumable
- is someone on the application, not someone simply gifting money
- can tremendously increase the amount of funds sought or rather substantially increase purchasing power
If you have a difficult or complex mortgage scenario, we can help start today by getting a complementary mortgage rate quote for your home.
In short the answer is no, but for a few reasons. A credit report is only as good as that moment in time that it is obtained by the creditor, mortgage company, bank etc. The Fair Credit Reporting Act & Home Mortgage Disclosure Act both prevent a lender from originating a new loan with another company’s credit report. Mortgage companies are under such tight scrutiny by Fannie Mae and Freddie Mac that in order to original loan a credit report is only indigenous to the mortgage company that actually originates the loan for the consumer.
As such, credit reports are only valid for that individual company. To get pre-approved purchase a home, a reputable mortgage professional will need the following items at the minimum:
- two years of most recent federal income tax returns
- two years of most recent W-2s
- pay stubs the most recent 30 days
- bank statements for the most recent 60 days, or quarterly if any accounts or quarterly or annually if any accounts are annual
- signed authorization form to create a loan application and permission to obtain a credit report
This information allows the lender to extrapolate the data they use necessary in qualifying you for purchase money financing.
Not allowing the lender to pull copy of your credit report is a recipe for disaster……… credit scores change, balances on credit obligations change, minimum payments on credit obligations change and the overall aspect of the total credit picture can change as well. Running numbers for pre-approval to make a purchase offer to buy a home, without all of the information risks the integrity of your ability to perform on the contract, as well as your buyers agent’s reputation in the local market.
* You can also use are complementary home affordability calculator.
If you would like to get pre-approved to buy a home, the right way, contact scott [Email address: email@example.com #AT# sonomacountymortgages.com - replace #AT# with @ ] today!