In this blog, we will cover and discuss credit scoring and how it works in the mortgage process. Credit scoring and how it works to qualify for a mortgage can be very simple. Credit Scoring by the three credit bureaus is used by lenders to determine the risk of borrowers they plan on lending. Credit scores can fluctuate monthly.
Credit Scoring and How It Works in the Mortgage Process
Borrowers applying for a mortgage should try to learn more about credit scoring and how it works. Maximizing credit scores is recommended. This is so borrowers can have the highest credit scores possible prior to applying for a mortgage. The higher a borrower’s credit scores are, the less risk the lender will judge borrowers. The lower the credit scores, the higher risk factor borrowers will pose to lenders: So which means that mortgage interest rates will be higher
What Are The 3 Major Credit Bureaus Used By Mortgage Lenders
A consumer credit score is rated by each of these three credit reporting agencies:
- TransUnion
- Experian
- Equifax
Credit Scoring and How It Works: Credit Score Ranges From a Low of 350 to a High of 850
The lowest credit score consumers can have is 350 to a high of 850. The higher one’s credit scores are, the lower the risk level the lender classifies the borrower. There are several types of credit scoring models. The most common where lenders use is the Fair Isaac & Company Inc, commonly referred to as FICO. Lenders use the FICO 2 Credit Scoring Model
Credit Scoring And How It Works With Credit Scores
The way credit scoring and how it works is that consumer scores only take into account the information reported on borrower’s profiles. The scoring model does not take into account the following:
- Assets of borrowers
- Income
- Amount of down payment
- Race, gender, marital status, place of national origin
- Criminal past
Factors Taken Into Account on Credit Scoring
The scoring model takes the following into account:
- Late payments are taken into account
- Payment behavior
- Current existing debt
- Length of credit history
- Types of credit borrower has
- Number of hard inquiries on report
The scoring model will analyze both positive and derogatory payment patterns and comes up with a specific number. The number can change monthly and gets updated.
How Credit Bureaus Update Credit & Credit Scoring And How It Works
Here are the components of consumer credit scores:
- 35% of a consumer’s overall score is from previous payment history
- 30% of the scoring model is from amount of balance versus limit
- 15% of the credit score is derived from how much debt a person has
- 15% of the score is from the longevity of tradelines which is when they opened the account with the creditor
Types of Credit Consumer Has
Types of credit in a consumer’s profile are taken into consideration in the overall credit score. A combination of installments and revolving debts is a good mix. 5% of the credit score component is new credit. The number of new hard inquiries will drop consumer credit scores but as it ages, it will not have any negative impact.
Maximizing Scoring To Qualify For Mortgage
The key to having higher scores is to always make timely payments to creditors who report to all three credit bureaus. One late payment can drop one’s credit score by 50 or more points. That late payment history will remain on a consumer credit report for 7 years. Most lenders will not allow any late payments after bankruptcy and/or foreclosure. One late payment for $5 dollar can be a deal killer
Tips On Maximizing Credit Scores
Here Are Tips In Maximizing Credit Scores Prior To Applying For Mortgages:
- Always make timely monthly payments
- Keep revolving account debt to 10% or below the credit limit
- Do not apply for too many creditors
- Each hard inquiry will drop scores by 2 or more points and is not a good reflection and not viewed favorably by lenders
- Never close unused cards because aged tradelines is a positive for scoring
How to Maximize Credit Scores Prior to Applying For A Mortgage
Homebuyers thinking of shopping for home and getting pre-approved should start optimizing their credit well in advance. This is because boosting scores does take time and cannot be done overnight. I get many calls from home buyers who need to qualify for mortgage but do not yet qualify. This is because they cannot meet the 580 FICO minimum requirement
Minimum Credit Scores Required To Qualify For Home Loans
Here are the minimum FICO Requirements to qualify for mortgages:
- HUD Guidelines Requires a 580 FICO for 3.5% down payment FHA loans
- HUD guidelines allow borrowers with under 580 credit scores down to 500 FICO to be eligible for FHA loans
- VA does not have any credit score requirements
- Most VA loan programs from most lenders will require 620 FICO due to lender overlays
- There are lenders that will go down to 500 FICO
- Gustan Cho Associates has no overlays on VA loans
- Fannie Mae and Freddie Mac require 620 FICO on Conventional loans
- USDA require 580 FICO
- Most USDA Lenders will want 640 FICO as part of their overlays
- Jumbo Mortgages require 680 FICO
- Gustan Cho Associates has Jumbo Programs down to 500 FICO
- Condotel and Non-Warrantable Condo Loan Programs require 680 FICO
Credit Report And Credit Scoring And How It Works
The credit report must contain at least one account which has been open for six months or greater. At least one account that has been updated in the past six months for consumers to get a credit score. This ensures that there is enough information in the credit report to generate an accurate score. If consumers do not meet the minimum criteria for getting a score, they may need to establish a credit history prior to applying for a mortgage.
