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.
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.
4 steps to a good mortgage rate
- Factors beyond credit scores.
- Scrutinize your credit reports.
- Bump up your credit score.
- Don't close any accounts.
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%||620-659 tier||7.096%|
|700-759 tier||6.002%||580-619 tier||8.583%|
|660-699 tier||6.286%||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 scoresWhile 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."