Borrowers with high FICO scores — the top tier ranges between 760 and 850 — can expect lenders to offer them lower interest rates and more loan choices. Lower scores usually place a borrower in the “subprime” category, and they can expect to be quoted significantly higher interest rates and may be offered fewer varieties of loans. A FICO score of about 500-520 is generally the minimum that will qualify for a mortgage.
There are several considerations when getting a mortgage loan — three of the most important are your:
- Debt-to-income ratio
- Credit rating
I will review each one in turn, and then help you understand how credit scores can impact your rate.
- Loan to value
- This is calculation looking at how much you want to borrow, relative to the value of the home. It is directly impacted by the amount of money that you can put down on your new home. The larger the down payment, relative to the value of the home, the less risk the lender has to take in extending to you a loan.
- Debt to Income
- This ratio looks at your monthly debt obligations (payments of interest and principal) as a percentage of your monthly income. If you have a significant amount of debt, your debt service burden may be too high for a lender to comfortably give you a loan. You need to either increase your income, or cut your debts.
- Credit Rating
- Your loan, including terms like interest rate and points, will depend on your credit worthiness. One measure of credit quality is a credit score (sometimes a specific 'FICO' score). Your credit rating is calculated based on several variables, including: your payment history (do you have any late payments, charge-offs, etc.), the amount and type of debt that you owe, if you have maxed out any of your trade lines, and then several other secondary factors like the length of your credit history and how many recent inquiries have been made to look at your credit history. If you have a good credit score, you will get a better loan.
Fair Isaac's consumer Web site offers a chart that is updated regularly and shows how your FICO score can affect your interest rate. According to the chart, here's what a borrower could have expected to be charged in interest for a $450,000 30-year fixed rate mortgage, according to September 2007 interest rates:
|FICO score||APR||Monthly payment|
As you can see, with your current score of 520 you could be charged about 9.58%. It is vital that you understand your whole credit profile, not just your score. Score alone is not the end all be all to mortgage qualification. Other offsetting factors can balance a low credit score, such as a large down payment, large cash reserves or an overall low debt to income ratio. I encourage you to visit the Bills.com Mortgage Resources where you can read about the various types of mortgages available on the market and determine what type of loan you are interested in borrowing. If you enter your contact information in the Bills.com Savings Center at the top of the page, we can have several pre-screened mortgage brokers contact you to discuss the options available to you. Bills.com also has useful tips on tracking and improving your credit.
I hope the information I have provided helps you Find. Learn. Save!