 |
|
|
|
One of the leading things that a lender considers when reviewing an application for a mortgage loan (or any loan for that matter) is the potential borrower's credit history. A person's credit history is nothing more than a record of their various loans and credit cards, the balances of any current loans or credit cards, a payment history, and any other pertinent financial information. The three main sources of information for a credit history are:
Credit Score
Credit reporting companies use models that take into account an individual's credit history to generate a credit score. A credit score is nothing more than a numerical designation that gives an indication of the credit worthiness or credit risk of an individual. Lenders use credit scores to predict how likely an individual is to make their credit payments on time.
The most commonly used credit scoring model is the FICO model, which is named after the company that developed the model, Fair Isaac and Company. The resulting credit score is referred to as a FICO score. Every individual has three FICO scores, one from each of the three credit reporting companies: Experian, TransUnion, and Equifax. Lenders typically use the lowest reported credit score from the three companies when evaluating a loan application. When two individuals such as a husband and wife are applying for a mortgage, they take into account the lowest score of the six scores for the two people. Thus a spouse with a bad credit score can substantially impact a mortgage application.
What is Taken Into Account in a Credit Score
Many different factors are taken into account to develop the FICO score. These include:
How Credit Scores Impact Mortgage Interest Rates
Individuals with lower credit scores represent greater degrees of risk to lenders. As scores decline there is a greater risk of late payments, as well as default on the loan and possible foreclosure. This risk is represented in the interest rates that lenders charge individuals with lower credit scores. As an example, as of 12/12/2006, Fair Isaac Corporation reported the following differences in interest rates for credit score ranges:
| FICO Score | APR * |
|---|---|
| 760-850 | 5.742% |
| 700-759 | 5.964% |
| 660-699 | 6.248% |
| 620-659 | 7.058% |
| 580-619 | 8.271% |
| 500-579 | 9.169% |
* APR = annual percentage rate
Please note that interest rates change at least daily.
Credit Grade
Lenders use credit scores and credit history to provide a credit grade for individuals, on an A, B, C scale. The best grade is an A. An A grade borrower has a FICO score of 680 or higher, has low debt, has no late mortgage payments in the last 24 months, has no or only 1 late payment of 30 or 60 days, and has not declared bankruptcy in the last 2 to 10 years. Grades decline from A as debt rates increase, the number of late payments increase (especially mortgage late payments), the length of time of the late payment increases (60, or 90 days vs. 30), and recency of bankruptcy in the lower grades. In general the credit scores for the lower grades are:
Each lender's grading criteria will vary and the FICO scores and other metrics for each given bracket will vary somewhat.
To Obtain a Credit Report
Congress recently passed legislation allowing individuals to get an annual credit report from each of the three credit bureaus (Experian, TransUnion, and Equifax) for free without any impact on their credit score for the inquiry. For an extra fee, they will also provide the individual with their credit score. To obtain free credit reports see: AnnualCreditReport.com.
Get multiple quotes. Choose the best rate. No obligation.
Common Mortgage Types
• Adjustable Rate Mortgage
• Fixed Rate Mortgage
• Understanding Arm Indexes
Government Mortgages
• FHA Loans
• HCFP Loans
• VA Loans
• State Housing Financing
Home Equity Loans
• Home Equity Line Of Credit
• Obtaining Equity From Your Home
• Reverse Annuity Mortgage
• Second Mortgages
More Resources
• Mortgage And Lender FAQ
• Mortgage Information Search
Mortgage Process
• Avoiding A Jumbo Mortgage
• Avoiding Private Mortgage Insurance
• Dealing With Credit Issues
• Glossary Of Mortgage Terms
• Mortgage Application Process
• Mortgage Laws And Regulations To Protect The Consumer
• Shopping For A Mortgage
• Understanding Credit
New Home Mortgage
• How Much House You Can Afford
• How Much Should You Put Down On A Home
• Mortgage Pre Qualification And Pre Approval
• Mortgages For Purchasing A Home
Refinancing A Home
• Refinancing Your Home
Related Products And Services
• Mortgage Life Insurance
• Private Mortgage Insurance
• Title Insurance
Specialty Mortgages
• Alt A Mortgages
• Balloon Mortgage
• Bridge Loan
• Construction Loan
• Eighty Twenty Mortgages
• Graduated Payment Mortgage
• Growing Equity Mortgage
• Interest Only Mortgage
• Low Doc No Doc Mortgages
• Subprime Loan
AL
AK
AZ
AR
CA
CO
CT
DE
DC
FL
GA
HI
ID
IL
IN
IA
KS
KY
LA
ME
MD
MA
MI
MN
MS
MO
MT
NE
NV
NH
NJ
NM
NY
NC
ND
OH
OK
OR
PA
RI
SC
SD
TN
TX
UT
VT
VI
VA
WA
WV
WI
WY
Assurity Financial Services LLC
Financial Freedom Senior Funding Corp
First Horizon Home Loan Corporation
Pinnacle Financial Corporation
Copyright © 2004-2008. All Rights Reserved. Moving Traffic, Inc., operator of CityTownInfo.com, is not a broker or a lender, and all offers for loans or mortgages found on this site are made solely by the advertiser.
