Credit Scores and How They Affect Mortgage Rates

Everyone suspects that their credit score is important but to what degree does it affect mortgage rate? Let me take it a step back, credit scoring is a numeric way of weighing various financial factors, like debts, job history, credit history, and other factors, which can help preduct the likelinhood of the borrower defaulting on the mortgage. While there are several credit scoring models used, most lenders seem to use the Fair, Isaac & Co. (FICO) score that ranges from 300 - 850. The lower the score the higher the risk. This is how a score affects a borrower:

750+ = A+  - entitles the borrower to the best interest rates and terms

740-749 = A - very good; entitles the borrower to lower interest rates and terms than B

680-739 = B - good; the borrower pays higher interest rates than A or A+

620-679 = B- - fair; borrower would pay higher rates and be required to put more money down

340-619 = F - poor; borrower would not be eligible for conventional mortgages in most cases

Credit scoring takes into account numerous components. For example, the longer that you have had a credit card without late payments, the higher the score. The single most important thing one can do to improve his credit score is pay timely. One late payment can affect the score anywhere between 20-80 points. The more sources of good credit you have the higher the score. On the negative side, slow payments lower the credit score, as do high loan balances. If account balances are 75% or more of the credit limit, it may signal high financial leverage and a higher risk to the lender. Credit balances should not exceed 30% of the credit limit. Never use one credit card to pay off another credit card, when you want a high credit score. Do not make inquiries or apply for new credit cards or loans before closing, as this can lower the borrower's score by 5 points each time.

For more tips, contact me on how to improve your credit score before applying for a home loan.