How Credit Score Affects Your Mortgage?

Your interest rate, maximum loan to value and mortgage options are all dependent on your credit score. Your credit score and what is on your credit report all affect your ability to get a mortgage. On a credit report, there are 3 scores, one from each of the 3 credit bureaus. Scores are different because different creditors do not all report your debts to all three bureaus. The middle score is the one that is used.

If your middle score is a 680 or over
If your middle score is a 680 or over, you are considered “A” credit, and qualify for the lowest rates and greatest number of financing options. You can go “no doc” meaning you don’t have to provide any proof of income. You also qualify for mortgage that in many cases do not have a pre-pay penalty. If you are financing no more than 80% of the value of your home, you can get fixed interest rates at the low advertised rates you hear on the radio or see on TV.

If your score is at least a 620 or 640
If your score is at least a 620 or 640, depending on the lender, you will still qualify for up to 100% financing going no-doc, but your rates may be a bit higher. You will still qualify for Option ARM mortgages, which give you 4 payment options each month. You can also get 40 or 50 year term mortgages and interest-only mortgages. In most cases, you will have a 2 or 3 year pre-pay penalty, if your state allows it.

If your score is below a 600
If your score is below a 600, your options start to be more limited. You are now considered a “sub-prime” borrower, and will most certainly have a pre-pay penalty, and will probably be offered a 2-year ARM instead of a 30-year fixed mortgage. You will still qualify for some Option ARM programs, but only at 80% LTV. If your score is at least a 580, you will still be able to get 100% financing if you go “full doc”, meaning you show proof of income for the past 2 years, plus 2 most recent pay stubs and proof of enough money in the bank to cover at least 2 months’ worth of principle, interest, taxes and insurance. Your interest rate can be about 1% higher than someone with excellent credit.

If your score is below a 580
If your score is below a 580, you can no longer qualify for 100% financing in most cases. Some mortgage brokers have lenders that will do 100% financing down to a 500 credit score, but these mortgages have expensive Private Mortgage Insurance to deal with, and become very expensive. With PMI, you can pay as much as $330 per month for every $100,000 financed. In general, at a 580, you can only get up to 90 or 95% loan to value, meaning you instead of being able to refinance up to the full appraised value. Your interest rate can be up to 2% higher than what a person with excellent credit will get.

If your score is below a 540
If your score is below a 540, you are often limited to refinancing at no more than 80% loan to value ratio. Plus, your interest rate will be as much as 3% higher than someone who has “A” credit.

If your score is below a 500
If your score is below a 500, you are limited to asset-based lenders, who don’t care about credit. They will lend up to 65% or 70% of the value of your home, and charge up to 13% interest plus 4 points. Clearly this is a very expensive way to refinance your mortgage! This is not the way to do debt consolidation or reduce your bills.

Along with your credit score, lenders look at what is on the report. Some lenders will accept a borrower who is a day out of a discharged bankruptcy, while others want the bankruptcy to be discharged for a year. Some lenders will look to see that you have not had any foreclosures or notices of default for at least 24 months prior to your mortgage application. This can be on any property you own, and not just on the one on which you are doing the refinance. If you have excessive charge-offs or collection accounts, that can keep you from getting a mortgage. Some lenders don’t want to see anything over $5000 in collections or charge-offs.

If you owe back child support, watch out! All lenders pull your state’s court documents to verify that no back support is owed. If so, you won’t be able to refinance your mortgage unless it is paid off. Other liens such as unpaid tax liens will also be paid off with the loan proceeds. I have seen clients looking to do a refinance back out when they realized how much of their cash-out would have to go to pay off back bills and liens.

Your current mortgage payment history is important with many lenders. Your credit report will show the number of 30, 60 and 90 day lates you have over the past year or two. If you have a private mortgage with someone, the lender will ask for a Verification of Mortgage. If you show any 30-day lates, this will drop you a letter grade or two, meaning that for a given credit score, you will have even a higher interest rate, or a lower loan to value, or both. Always work with your mortgage consultant to see what you will need to do to get your mortgage re-financed if you are in any of these situations.

I hope this gives you an overview of how your credit impacts your ability to get a mortgage. Remember, even if you had a bankruptcy, you can still get a mortgage. The most important thing is to show a clean 12 month rental payment history. If your rental history is shaky, you will pay a premium to get a mortgage. If anything I presented here sounds confusing, please call or email me right away!

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