Credit scores exist for one reason: risk assessment. If you are getting a loan, instead of manually assessing your credit records for the past 12 to 24 months, your lenders will just see your credit rating or credit score. This score reflects the kind of borrower that you are, also known as your creditworthiness. The higher your score is, the more chances you will have of getting your loan application approved.
Now, there are different scoring systems with varying ranges, but the bottomline is the same: a lower score indicates high borrower risk and a high score implies that you are a safer borrower.
You may find scores from FICO, the most commonly-used scoring system among lenders. You can also have a different score from VantageScore, and another from each of the three credit-reporting bureaus: Experian, TransUnion, and Equifax.
Scores in Mortgage
Just like when your score is used to assess your auto or student loan applications, your credit score will be used to determine:
- whether you are eligible for a qualified or non-qualified mortgage; and
- what your interest rate will be on your home loan.
Typically a credit score of FICO 620 is minimum to get a prime mortgage rate, although there are mortgage programs that accept lower scores such as the FHA loan which only requires its borrowers to have a score of FICO 580 to qualify for the 3.5 percent down payment privilege. If the applicant’s score is lower than the threshold, the down payment will be increased to 10 percent. If you are a military serviceman/woman, there also exists a VA-insured home loan which does not require any credit assessment at all.
Beyond the Score
Lenders do not take the surface value of your score. They also look at the details of your record, accounting into their decision-making factors such as your current outstanding debt, the length of your credit record, the number of inquiries on your report, etc. They also look at your utilization ratio and the timing of payments.
If you have a low balance on your revolving credits, have good history of payments, and no report of delinquencies in the past, you are very likely to get the financing you need.
If not, you can take measures to help build good credit – albeit it may take some time. It’s also important that you inspect your record for any errors. Errors, if they go undetected, and put a significant dent on your score and hinder your chances of a loan approval, be it for a personal or home loan. Contact your lender/s to dispute the fault/s in your record, and inform the credit-reporting agency about that you are contesting an error in your report.
Paying off your balances helps a great deal as well, but you need to wait for a time for your score to change.
A single-point difference in your interest rate can mean hundreds of dollars in your monthly payments – that’s thousands for the entirety of your mortgage life. If you want to get financing for your home or refinance an existing one – especially with today’s historic low averages, nursing your score back to its best shape is the best way to get started.Get Connected Here »