Your Credit Score Can Make Or Break Your Mortgage
Fix your credit report before you apply for a mortgage and you could literally save more than $100,000 over the course of your loan.
If you are applying for a mortgage, you probably know that you will have to submit your credit score as part of the process. While your credit score might seem like a mysterious number that you have little or no control over, you will be pleasantly surprised to find out that this is not the case.
First of all, what is a credit score? In a nutshell, it is a computer-generated number that ideally objectively evaluates all of the information in your credit report. The most used credit score in the US is the FICO score. It is a number between 300 and 850 determined with a formula developed by the Fair Isaac Corporation.
This number is often called a "snapshot" of the risk that represents your overall trustworthiness to lenders. Just as an SAT score isn't the most accurate score of your intelligence or how you will do in college, a credit score isn't necessarily the best indicator of how you will perform with a loan. Still, like the SAT, the scores are widely used because they are relatively inexpensive and somewhat reliable.
The whole idea behind credit scores is that people with higher credit scores are thought to be less likely to default on their loans and therefore are offered lower interest rates and a wider variety of loans from lenders.
Each person actually has three different FICO credit scores as the three national credit bureaus (Experian, Equifax, and TransUnion) all use their own databases to determine your score.
The median score is 723, but in the eyes of lenders, there really isn't much difference between a 720 score and an 850. So, as a borrower, as long as you cross that 720 threshold, you are in good territory.
The score is determined from your credit report. Some of the factors that go into that report are as follows:
- Your payment history: have you been paying your bills on time?
- The amount you owe: how much overall debt do you have?
- The length of your credit history: how long have you been borrowing money?
- New credit: Have you opened any new accounts lately?
- Types of credit used: are you using credit in different ways? Car loans, house loans, student loans, etc.?
A credit score isn't everything. Other things considered on your loan application include your income, your employment history, the location of the property, and how much cash you are putting down. Still, lenders need some kind of standard, and the credit score is what they use-so it makes sense to get it in shape and play their game. While it might not be an accurate assessment of how you will do with your loan, it will affect how much you pay for your loan.
For example, on a 30-year loan for $300,000 dollars, someone with an upper level 760-850 FICO score will pay $1,556 per month on an APR of 4.698%. A borrower at the lower end with a 620-639 score will pay $1,854 on 6.287%. Add that up over the 30 year span of the loan, and you'll get a difference of a whopping $107,208 dollars.
This is a huge difference! Luckily, if you have a low score, there are many things that you can do to change it.
First things first, though. If you are planning on looking for a home or getting a mortgage, you should check your credit at least 90 days before you apply. This will give you ample time to clear your record and hopefully improve your score. Even if you aren't going to be looking anytime soon, it makes sense to get your credit score checked now.
As a result of the FACT Act (Fair and Accurate Credit Transactions Act), each US citizen is allowed one free credit check from the three main credit agencies per year. This site is the only one authorized under federal law to do this for you. The report will give you a chance to make sure that your information is correct and it will let you see any red flags on your accounts. If anything is incorrect, you can ask in writing that the information be corrected or removed from your report. The different bureaus are required by law to investigate your complaint within thirty days.
Remember, your credit report is not the same thing as your FICO score. To get this, head on over to the FICO site. The score costs a small fee, but is worth it in the long run.
Once you have looked at your credit score and fixed what you can, move forward by paying your bills on time, keeping account balances low, and only taking out new credit when you need it. Also, pay off your credit card balances, don't close unused accounts, and don't open new accounts.
For better or worse, your credit score plays a large part in how much you pay for your mortgage. The bottom line is that even though your credit score looks like a mysterious number that you have little or no control over, there's actually a lot that you can do to improve it. And the time it takes to fix things is minimal compared to the potential savings over the span of your loan.