For all the fuss lenders make about them, you would think a credit rating would be a number larger than three digits. Nevertheless, small as this number is, it can be the life or death of a mortgage application. A very low score equals no approvals. If you do get approved, there’ll probably be a hefty interest charge and down payment to boot. A high FICO score, on the other hand, gives you easy and cheaper access to home financing.
If you are planning to approach a mortgage lender, you need to find out what your score is. You also need to take this action early enough, so that you can have enough time to remedy the rating if it is too low. The key to a good score is a clean financial bill of health. Without it, you will have a hard time getting good deals from landlords, lenders, or employers.
Why? Business people are becoming more reliant on this metric to gauge how a prospective business partner, borrower, or tenant manages their credit and money. A lender will therefore first check your credit rating, before any further discussions on the credit application. If you have negative marks on your credit report it's a good idea to hire a credit repair company. Read this review from Crediful about credit repair companies like Lexington Law before making a decision on which company to hire.
The real estate industry is heavily dependent on mortgage companies. Very few home buyers are capable of purchasing a home entirely for cash. Data shows that in 2017, only a paltry 23% of all home purchases were settled in cash.
If you dig deeper into the data, you will find that most of these purchases were for distressed or second homes. Therefore, unless you have won the lottery or robbed a bank, you are probably part of the more significant percentage of prospective home buyers that need a mortgage to finance your purchase.
Which credit score do mortgage lenders use?
A few months ago, Kacy, a laboratory technician, thought her credit rating was good enough for her to get good home credit terms. The last time she had it checked, it was at 740. She was sure that she would snag a reasonable interest rate and a lower down payment as well from her lender.
On D-day, Kacy got a rude shock when her financing company told her that her 'classic' FICO score was low. According to the mortgages officer, she had 50 points fewer than what her online score monitoring platform had revealed. The lower rating meant that she would have to cough up more interest. Kacy began to doubt her ability to pay off her borrowing under the terms given.
If you are going to approach a lender for a hefty amount of money, a score retrieved online might be a tad misleading. The discrepancy might be in your favor or not. Most lenders, however, use FICO ratings. FICO says that 90% of all lending decisions are based on its data. Other lenders use the VantageScore. The firm says that 2,500 financial institutions used 10.5 billion of its ratings in a year. The majority of VantageScore data users, however, are card firms.
What rating should you have before applying for a mortgage?
According to the Federal Reserve's data, 90% of all mortgages taken in the US in the first three months of 2019 were from borrowers with a score of 650 and above. At least 75% of the applications were from prospective homebuyers with a score of 700 and above. The median rating for the year, however, stands at 759. At least 10% of all potential buyers had a credit rating of 647 and under.
However, the national average for FICO ratings is 704. If your rating lies between 700 and 749, you generally are said to have a good score. If yours ranges from 650 to 700, then you have a fair score. Nevertheless, if you have been financially disciplined and have a rating above 750, then you are a choice borrower, the kind any mortgage lender would smile at. This should give you some of the best interest rates in the industry.
You can, therefore, qualify for a home loan if you have a score lower than the median. However, the higher, the better. The eventual savings you get with a good score will impact the final cost of the house as well your down payment. If these costs are lower, it will be much easier for you to make repayments. Lower repayments will also leave more cash in your checking account at the end of the month.
How much can you save if you work on your credit score?
A small incremental increase of your score from 680 to 700, for instance, can profoundly impact the cost of your loan as per expert from https://nation21loans.com. Kacy, for example, had hers diminished from the expected 740 to 690. If her classic FICO rating had been above 700, it would have saved her thousands in repayments.
For a 30-year fixed home loan of $266,000, she would have enjoyed at least $89,804 in savings. There are, of course, other factors that would influence this amount such as the size of the down payment, her income, and the cost of the home.
What can you do improve your score?
The easiest way to build up your credit score is to start making timely payments each month. Your payment history will constitute 35% of your rating. This history forms the bulk of the factors that rating bureaus take into consideration.
The inability to pay off your bills, or to make debt repayments on time, is a common problem. This is especially so in an age where the cost of living is on the rise. Unfortunately, people’s wages are struggling to keep up with this pace. In fact, for most breadwinners, the wage rate has stagnated while their bills have increased.
Consequently, to ensure that all your payments are made in time, you must automate them. If you set up an automated payment for the minimum balance at the end of each month, you will soon be on the road to financial recovery.
If possible, set up the automated payment to cover the full amount you owe, so that your debt can stop enlarging. Ensure that the high-interest type of mortgage is paid off first since it balloons every time you default.
Cut down also on the usage of your credit line to ensure that your credit utilization ratio stays at a minimum. This ratio accounts for at least 30% of your score, so keep it below the 30% mark. If your card allows you to spend a maximum $10,000 at a time, keep it below the $3,000 mark.
Additionally, keep your oldest credit account open. A lengthy credit history will give your rating a 15% boost. If you have too many credit inquiries, you could adversely affect your score. Keep new lines of credit to a minimum to reduce the number of credit checks done. Too many and you will lose 10% of your score. Finally, borrow diversely. Different types of credit will embellish your score by 10%.
The Bottom Line Financial experts warn that a credit score between 620 to 679 could add a 5% higher interest charge to a mortgage loan than that of a person with a higher score. This charge can bulk up over a 30-year repayment period. Work for the best score before approaching a mortgage lender. Your financial future will thank you for it.