Understanding Your Credit
Ratings
Perhaps the
most
important element
of obtaining a good rate on your mortgage is your
credit
history.
This section is designed to help you assess your possible credit rating and
what type of terms you can expect from a lender.
Mortgage
When you apply for a
mortgage loan from a lender, broker or private investor the most
important
factor is your credit. In some cases
it is only your credit that determines your ability to
obtain a mortgage loan. There are other factors but
credit
is
by far the most critical factor that both determines weather you will get a
mortgage loan and at what rate of interest you will get the mortgage loan
at. The better your credit rating the better you mortgage loan rate will be.
The three major credit
reporting agencies are:
Experian PO Box 2104 Allen, TX 75013 1-800-682-7654
TransUnion PO Box 390 Springfield, PA
1-800-916-8800
Equifax
PO Box 105873 Atlanta, GA 1-800-685-1111
General Guide to
Credit Ratings
This is a general guide to what is called "A-B-C-D" credit. These grades are
typical of the requirements used by many lenders, but are not absolute
grades. Individual lenders typically have similar but somewhat different
specifications. Keep in mind that late payments, called "lates", are
generally tracked within the previous 12-month period.
"A" Credit
Considered the best credit rating.
FICO
Scores are
generally 620 and up with no lates on mortgage and no more than one
30-days-late on revolving or installment credit. No bankruptcy within past
2-10 years. Maximum debt ratio is 36-40% while maximum loan-to-value ratio
is 95-100%. This type of credit will demand the best interest rate
available!
B+ to B-
General good credit with
FICO
Scores from 581 - 619.
Two or three 30-days-late on mortgage and two to four 30-days-late on
revolving or installment credit. Cannot have any 60 day lates. Must be 2-4
years since bankruptcy discharge. Maximum debt ratio averages 45-50% while
maximum loan-to-value ratio is 90-95%. This type of credit will obtain rates
1-2% higher than current market rate.
C+ to C-
Fair credit with
FICO
Scores from 551-580.
Three to four 30-days-late on mortgage are allowed. Installment or revolving
credit can have four to six 30-days-late or two to four 60-days-late. Must
have 1-2 years since bankruptcy discharge. Maximum debt ratio runs around
55% with maximum loan-to-value ratio averaging 80-90%. This type of credit
will generate rates 3-4% higher than current market.
D+ to D-
Overall poor
credit history with
FICO
Scores
from 550 and lower. Two to six 30-days-late on mortgage or one to two
60-days-late, with isolated 90 days late. Revolving and installment lates
show poor payment record with pattern of late payments. Possible current
bankruptcy or foreclosure allowed with all unpaid judgments to be paid with
loan proceeds. Must have stable employment. Maximum debt ratio averages
60% with max loan-to-value of 70-80%. This type of credit will result in
high interest rates (12-14%), but borrower can always refinance after one
year of "on-time" mortgage payments to bring rate down.
Please keep in mind these are "general" guidelines. Some lenders assign
different grades or use different grade definitions based upon their own
method of evaluation
Always remember to check your credit report for errors once a year! It is
estimated that 50% of all credit reports contain errors significant enough
for an individual to be denied a loan!
Scoring categories
The scale runs from 300 to 850. The vast majority of
people will have scores between 600 and 800. A score of 720 or higher will
get you the most favorable interest rates on a mortgage, according to data
from Fair Isaac Corp., a California-based company that developed the credit
score. (Its own score is called the FICO score.)
Fair Isaac reports that the American public's credit scores break out along
these lines:
|
Credit
score
|
Percentage
|
| 499 and below | 1 percent |
| 500-549 | 5 percent |
| 550-599 | 7 percent |
| 600-649 | 11 percent |
| 650-699 | 16 percent |
| 700-749 | 20 percent |
| 749-799 | 29 percent |
| 800 and above | 11 percent |
What's the big deal?
Your credit score will determine if you get credit at all, and the interest
rate on that credit, says Ed Ojdana, president of Experian Consumer Direct,
part of Experian, the largest of the three major credit-reporting agencies.
"The better the score, the lower the interest rate and that can save you a
ton of money."
The difference in the interest rates offered to a person with a score of 520
and a person with a 720 score is 3.45 percentage points, according to
Fair Isaac's Web site.
On a $100,000, 30-year mortgage, that difference would cost more than
$85,000 extra in interest charges, according to BankRate.com's
mortgage calculator.
The difference in the monthly payment alone would be about $235.
Do you know the score?
More importantly, do you know your own score and how to improve it?
You have probably heard of credit scores, and that they bear an impact on
most of your financial world, including interest rates and limits on credit
cards, auto loans and home loans, even affecting the cost of your car
insurance premiums. What you may not know is that very simple, seemingly
innocent actions may impact your credit score in surprising ways. Taking out
a car loan could cause your credit card interest rate to double! Missing a
student loan payment could cause your auto insurer to deny your policy
renewal! What can you do to protect your score, and even ramp it up? A few
quick tips:
Keep your credit card balances under 50% of the limit on the card.
Many people believe that a low limit will translate into improved credit,
but not generally so. It is better to have a $5000 balance on a card with a
$10,000 limit, than a $3900 balance on a card with a $4000 limit. Therefore,
increasing limits on your cards without increasing your balance will
actually improve your credit score.
Think twice about closing out credit card accounts,
even if they are inactive or infrequently used. Many will think that closing
out accounts will have a positive impact on their credit score…this is not
true! Even long-dormant accounts will figure positively toward your history,
and the extra available credit won’t hurt your score either.
Be cautious of certain types of inquiries to your credit.
Most consumers are aware that extra checks into your credit history may
cause your score to drop. This is due to the appearance of a consumer
looking to take on extra debt. But did you know that even multiple inquiries
for a mortgage will not hurt your score any more than just one inquiry, so
long as they are within the same 30 day period?
Get a copy of your score from each of the three credit bureaus (Equifax,
Experian and TransUnion) along with a copy of your report. You can obtain
this information through
www.myfico.com for under $40. If you have
questions on this report once you receive it, please contact me and I would
be happy to review the details with you.
