Mortgage Rates And Credit Scores Go Hand In Hand

Mortgage Rates And Credit Scores

Gustan Cho Associates

Credit scores do have impact on what mortgage rates you get, especially on conventional loan programs.  Credit scores are also the main factor used for qualification purposes.  You must meet minimum credit score requirements to qualify for specific mortgage loan programs.  For example, minimum credit scores required to qualify for a 3.5% down payment FHA insured mortgage loan, you need a 530 FICO credit score.  To qualify for a FHA loan that requires a minimum down payment of 10%, your credit scores need to be between 500 FICO and 579 FICO.  To qualify for a conventional mortgage loan, your minimum credit score needs to be at 620 FICO.  For condotel unit and non-warrantable loan programs, your credit scores needs to be at least 680 FICO.  To qualify for a jumbo mortgage, your minimum credit score needs to be at least 700 FICO.    Having good credit scores are not just to meet minimum qualification guidelines but credit scores can have great impact on what mortgage rate you get.

Conventional Loans And Credit Scores

If you want the best mortgage rate for a conventional loan, you need a credit score of 740 FICO or higher.  For every 20 FICO point drop, your mortage rate will be higher.  The higher rate a mortgage lender charges you due to a lower credit score is called a price adjustments.  Normally, with conventional loans, there are price adjustments for every 20 points.  FHA loans are not as credit sensitive as conventional loans unless your credit score falls below 600 FICO.  To get the best FHA mortgage rates, all you need is a credit score of 640 FICO or higher.  With FHA loans, your mortgage rate will be the same whether your credit score is 640 FICO or 740 FICO.  However, if your credit scores fall below 640 FICO, your mortgage rates will be higher.  If your credit scores are below 600 FICO, you can expect to pay over 1.0% in mortgage rate higher than if your credit scores were at 640 FICO or higher.

Credit Scores

Mortgage lenders will pull your credit from the three giant credit reporting agencies when you apply for a mortgage: Transunion, Experian, and Equifax.  Each credit bureau will have a specific credit score for each consumer.  Mortgage lenders will use the middle credit score to qualify a mortgage loan applicant.  For example, if your Transunion credit score is 600, your Experian credit score is 650, and your Equifax credit score is 700, your 650 Experian middle score will be used and that score will be the determinant of whether you qualify for a particular mortgage loan program and the mortgage rates you will get.

How Lenders View Credit Scores

Your credit scores will have a range between 300 and 850.  A credit score of over 700 FICO is considered a good risk mortgage loan borrower.  Anyone with a credit score of 620 FICO or lower is considered a high risk mortgage loan borrower.  Your credit score is derived by various factors.  35% of your credit score will be derived by your overall payment history and how timely you are in paying your bills.  30% of your credit score consist of the balance you owe your creditors compared to the credit limit.  15% of your credit score consist of the longevity of your overall credit history and how long you have had active credit accounts.  The final 10% that make up your credit score is the mixture of credit you have.  For example, your credit scores will be higher if you had installment loans, revolving credit, mortgage loans, automobile loans, and personal loans.  Credit bureaus wants you to have a variety of credit mix versus just one type of credit such as just having credit cards and no auto loans, mortgage loans, student loans, etc.

How mortgage lenders view credit scores with regards to morgage rates

Mortgage lenders view that a person’s credit score reflects a person’s risk factor.  They believe a person with a higher credit score is financially more responsible  than a person with a lower FICO credit score and poses a less risk factor and a lesser chance of the mortgage loan to default.

Credit Scores Can Be Improved

If you are planning on buying a home in the near future, please consult with a mortgage banker or mortgage broker and have the mortgage loan originator qualify you.  If you have lower credit scores, there might be some quick fixes to improve your credit scores in a short period of time.  People who have their credit cards maxed out normally can boost their credit scores almost right away by paying down their credit card balances.  Others might not have enough active credit or no re-established credit after a period of bad credit or after a bankruptcy or foreclosure.  Getting three to five secured credit cards may do the trick. Each secured credit card can boost a person’s credit scores by 20 or more points.  Yet others may have errors on their credit report and may need to dispute the derogatory if they have proof that the derogatory is not theirs or the creditor and/or the credit reporting agency may have mispreported the derogatory information.

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The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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