It has overtones of Judgment Day,
sitting before a loan officer and applying for a mortgage.
Are you creditworthy? And to make that judgment, mortgage
lenders will review your all-important records, namely
your credit reports and credit score.
 |
4 steps to a good mortgage rate | |
| |
| | |
Each of the three major credit bureaus, Equifax, Experian
and TransUnion, collects data from your lenders about
your history of borrowing and paying back credit. They
compile that information into your credit
report, which any lender can access whenever you
apply for a loan. The Fair Isaac Corp. is the major
producer of credit scores. They take the information
from those credit reports, apply their own trade-secret
formula and, based on the three credit reports, distill
three credit scores for you into one score ranging from
300 to 850.
A new credit scoring system has been
developed by the three major credit bureaus -- the
VantageScore. Their VantageScore reports are available
for $5.95 each, a fraction of the cost of the FICO
score. However, the scores are not a direct substitute
for each other and mortgage lenders continue to look
at FICO scores when reviewing mortgage applications,
so they are the scores a mortgage borrower should
buy.
Borrowers with high FICO scores --
the top tier ranges between 760 and 850 -- can expect
lenders to offer them lower interest rates and more
loan choices. Scores of 620 or lower usually place
a borrower in the "subprime" category, and
they can expect to be quoted significantly higher
interest rates and may be offered fewer varieties
of loans. A FICO score of about 500-520 is generally
the minimum that will qualify for a mortgage.
Fair Isaac's consumer Web
site offers a chart that is updated regularly
and shows how your FICO score can affect your interest
rate.
For example, here's what a borrower
could have expected to be charged in interest for
a $300,000 30-year fixed rate mortgage, based on his
credit score, according to March 2007 interest rates:
|
| How FICO score affects mortgage rates |
|
|
| 760
to 850 tier |
5.780% |
| 700-759
tier |
6.002%
|
| 660-699
tier |
6.286% |
| 620-659
tier |
7.096%
|
| 580-619
tier |
8.583%
|
| 500-579
tier |
9.494%. |
|
Such variations
in interest rate can add hundreds of dollars to your monthly payment and can make
a big difference in the amount of debt for which you can be qualified.
Factors
beyond credit scores
While scores are important, they are not the only
thing lenders take into consideration when approving
a mortgage. And low scores aren't insurmountable obstacles,
says David Reed, an Austin, Texas-based mortgage broker
and author of "Mortgage Confidential: What You
Need to Know That Your Lender Won't Tell You."
"The FICO is one of the factors,
not the only one."
Other "offsetting factors"
can balance a low credit score, such as a large down
payment, large cash reserves or an overall low debt-to-income
ratio, says Reed. The important thing is that
borrowers not assume they can't get a mortgage because
of a low credit score, or that they limit their loan
search to lenders that specialize in loans to people
with troubled credit.
"From a credit standpoint, the
biggest thing people can do to harm themselves is
to prejudge their situation because they thought they
wouldn't qualify," says Reed.
He recommends looking for a lender who does not charge
a fee just to take your application and qualify you
for a loan. "There are plenty of other lenders
out there who will do that as a customer service,"
he says.
| -- Posted: March 19, 2007 |
|
