The number one factor in determining your interest rate on a mortgage today is the credit score aka, FICO score. When applying for a traditional mortgage, the income and reserve requirements are basically the same for all borrowers and there are no variations in interest rates. The FICO score is very important when it comes to obtaining a mortgage as this is the one variable that affects the interest rate. If there are two identical borrowers each with different FICO scores, the borrower with the low FICO score will get a higher interest rate than a borrower with a high FICO score.
If you are in the process of buying or refinancing a home, you should know your FICO score and monitor your credit report regularly. It only takes one 30 day late or medical collection to move your credit scores enough to cost you thousands in fees and interest or even disqualify you for a loan program.
At California Mortgage Advisors Inc., we understand the importance of the FICO score and how it affects our clients. We believe clients deserve to understand how their personal credit history is impacting their loan application process. If you have questions regarding credit scores and mortgages, our Mortgage Advisors are available now at (800) 927-6560 to assist you.
How Credit Scores Affect Mortgage Eligibility
The most important thing for borrowers to understand is that their credit score and their credit report are often viewed individually when determining mortgage eligibility. A mortgage is a unique type of loan and is treated differently than other types of debt. A mortgage applicant’s credit score reflects a general financial pattern, but it doesn’t tell a detailed story. Therefore, most lenders prefer to examine an applicant’s complete credit history before deciding.
Lenders want to know where debt is located and where missed payments are taking place. Are applicant’s missing several small payments or have they defaulted on a single large loan, such as a car note? Lenders are also looking for an extended credit history before deciding. Applicants with a limited credit history may find it difficult to get a mortgage despite an outstanding credit score. Ultimately, every lender is different. At CMA, we evaluate every applicant individually in trying to give them a mortgage that best fits their credit history.
How Credit Scores Affect Mortgage Interest Rates
Generally, there is not much mystery when it comes to the relationship between credit scores and mortgage interest rates; the better a borrower’s score, the lower their rate will be.
Improving Your Credit Score
Credit Scores are viewed as slow-moving, long-term reflections of an individual’s financial history. However, they can also be surprisingly fluid in the short-term. Small or moderate credit score improvements can have an immediate impact on available interest rates and loan programs. This is especially true for borrowers who may be in between credit tiers.
Improving a credit score in the short-term often comes down to managing debt levels on individual accounts. Available credit is an important part of the credit score calculation process. The closer an account comes to maximum usage, the more poorly it reflects on the account holders credit score. One counterintuitive thing to keep in mind is that available credit is viewed on an account-by-account basis and not as a summary across all accounts. This makes paying several accounts down slightly more advantageous than completely paying off a single account.
Borrowers applying for a mortgage should avoid increasing existing credit balances or applying for new lines of credit during the application process. Small increases in credit balances can shift credit scores slightly down, which may result in higher mortgage interest rates.
The best way for a borrower to understand how their credit scores and complete credit history are impacting their mortgage eligibility and loan terms is to speak with a CMA Mortgage Advisor. At CMA, transparency is one of our top priorities. It is important that our customers understand how their credit score is affecting the loan process and what they can do to manage the situation.
If you have questions regarding credit scores and mortgages, our Mortgage Advisors are available now at (800) 927-6560 to assist you.