How Credit History Influences Your Mortgage
First-time homebuyers are almost always advised to get their credit history and finances in order before applying for a mortgage. If you’re in the process of buying a home, you’ll soon find out that your credit score has a significant influence. Credit can impact your eligibility for financing, how large of a loan you qualify for and your rates.
However, this notion is entirely too simple. In reality, your credit score and history shape the home-buying process in more ways than one:
Want a lower rate? Work toward a higher score. Buyers who have scores that fall in the “excellent” range – above a 740 – can often take advantage of the best mortgage rates and a greater range of home loan programs. On the other hand, if your score is 620 or lower – the “fair” and “poor” ranges – your rates end up being much higher, and you’ll find it difficult to get qualified for a loan. Or, if you do get approved, your options are limited to a small number of government programs.
Just how great of an impact can your credit score make? According to data from FICO, rates for “low” and “high” scores are separated by one and a half percentage points. However, in terms of costs, a borrower in the “excellent” range paying 3.12 percent on a $216,000 30-year, fixed-rate mortgage will only spend $925 per month. For someone in the “fair” range paying 4.71 percent on the same loan, this amount comes out to $1,222 per month.
Fewer Loan Options
Any score under a 601 throws up red flags for lenders; thus, your options for getting a loan are limited. Prior to the housing crash, one out of seven borrowers with a low score could get a loan. Today, because of tighter restrictions, that ratio is one in every 500.
These days, mortgage options for those with low scores are typically government loans. FHA programs are open to borrowers with scores in the 500 to 550 range, if you’re willing to make a 10-percent down-payment. Even for these programs, higher scores reap better results. For FHA loans, if your score is above this range, you’ll only have to make a 3.5-percent down-payment.
However, some lenders are starting to understand that not every borrower is in the same situation. As a result, Ellie Mae’s figures for Spring 2014 show that more borrowers – 33 percent out of the total – with scores under a 700 were able to secure a loan. This number is up from 27 percent in 2013.
Further, more lenders are giving borrowers a chance to explain why their credit score dropped. In certain cases, a person whose score dipped because of a lost job, medical bills or student loans is looked at more favorably than someone who was financially irresponsible. In these instances, you may need to prove you have a history of consistently making your rent and utility payments on time for at least 12 months.
As is the case with every loan, the number isn’t all there is. A score can indicate a solid financial history, but lenders serious about approving you for a mortgage go into more depth. Whoever examines your application may look for:
- Low account balances and how recently your accounts were opened. Multiple accounts that were set up recently can decrease your score.
- Your history of making payments on time.
- The mix of existing credit accounts, including credit cards, student loans and car loans.
- The amount of outstanding debt you currently have and the ratio to the total amount of available debt.
- Length of credit history.
- How many inquiries are on your report?
To prepare, check your report – not just your score – at least a year before applying for a mortgage and begin cleaning it up. Look in detail at each account you have and, if you spot errors, inaccuracies or anything else questionable, dispute it with all three credit bureaus.
Once you are ready to apply for a loan, turn to Ion Bank for a range of conventional and government choices. To learn more or to start an application, contact us or stop by a branch location today.
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