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How Your Credit Score Affects Your Mortgage Rate

June 11th, 2013 Written By Carol Pawley

What-is-a-good-credit-score

Before mortgage lenders and banks determine your mortgage rate and other terms of your loan they thoroughly examine your credit score. The better your credit score, the lower the interest rate and the better the payback terms offered by the lending institution. A low credit score will impact your ability to get a loan and at a good rate.

 

Interest rates vary, depending on which rate you will qualify for, but they are always based on your credit score. Credit scores are reported according to grades, where an “A” is excellent, “B” good, “C” not very good, and “D” poor. “F” of course is the worst grade you can receive. Someone with a credit grade “A” will usually have no outstanding credit debts. A person with a “B” grade will perhaps have one or two outstanding obligations. With a “C” you likely have quite a few late payments pending, and a “D” indicates many debts owed or foreclosure declared.

 

When you apply for a loan, the difference between having an “A” grade and a “B” grade can make the difference of about 3 percentage points of interest on your loan. The same may apply to the difference between a “B” and a “C” grade. Those with “C” or “D” ratings may also have a tougher time even securing a mortgage. Below “D”, a borrower will probably not qualify for the loan at all. The difference in the monthly payment for a $200,000 loan between the highest and lowest scores is nearly $200 per month, which over the period of the loan can add up to more than $80,000. This doesn’t even include the lenders’ fees (which, by law, should all be disclosed). This is very significant.

 

In addition to the above grade scale, banks and lending institutions look at a cumulative credit score. All three major credit bureaus, TransUnion, Equifax and Experian, gather the information from the credit lenders. This gives them a picture of the history of your borrowing and repaying. The agencies compute that information into your credit score. These reports are open to any lender. The Fair Isaac Corporation (FICO) takes the information from those reports, and with their own unique formula, condenses them into one total score ranging from 300 to 850.

 

Lenders regard this credit score as a picture of your credit-worthiness. Borrowers with FICO scores between 760 and 850 will be offered lower interest rates and better terms. A score below 620 will place the borrower in the “subprime” category, where he will be receive higher interest rates and less desirable choices as far as terms and types of loans. A borrower with a FICO score of less than 500 will have a difficult time getting a loan.

 

When lenders look at a potential borrower’s credit report, what stands out are the low debt balances. A steady list of on-time payments also goes a long way. A car loan and a few revolving accounts such as credit cards paid in a timely fashion look appealing to a lender.

 

According to underwriting managers at a major mortgage firms, lenders weigh several variables on your credit report:

  • outstanding debt
  • the outstanding debt relative to the total available credit
  • the length of your credit history
  • and whether or not you’ve recently applied for new credit beyond a mortgage

 

*source realtor.com


Throughout the years I have helped many friends and clients purchase or sell property throughout Miami & the surrounding area.  If you are interested in purchasing or selling a home, please contact me as I can give some first-hand sound advice with no pressure.  Please send me an email at carolapawley@gmail.com or call me at  305-992-6188      .
 
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Great to have you on my site! Seeking to sell or buy property in Coconut Grove, Coral Gables, or anywhere in Miami? I can assist you. Real estate is my area of expertise and Miami-Dade the place I grew up. I know the communities, the schools, the culture, and the business of real estate. I’ve consistently ranked in the top 1% of my field, locally and nationally. I’d love to have the opportunity to introduce myself and discuss your real estate needs. Let’s connect: PH 305-992-6188,EMAIL: carolapawley@gmail.com

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