How to Become Mortgage Ready-Part 1: Check Your Credit

Orange County Calif 1^st Time Homebuyers are finding that the number of available homes for sale has shrunk to the point where making an offer and getting it accepted is a competition.  As in any competition, the strongest competitor will almost always win.  In the case of purchasing a home, you become a strong contender by making sure that your financing is in place before you make that offer.

The process of securing financing is not as simple as filling out an application and 5 minutes later receiving an answer.  There are significant steps involved in becoming mortgage ready which I will describe in the next several days.

Part One - Check Your Credit!

The very first action a lender will take after completing a loan application is to run your credit report - your all important FICO score is the first step guiding us how to proceed.  Lenders pull a credit report that consolidates information from all three credit bureaus (Equifax, Experian, TransUnion) and presents the information in one report.  This report will contain your FICO scores from all 3 credit bureaus and they will very, very rarely be the same because of differences in the software programs used to calculate the scores.  Lenders will use the middle score of the 3 to begin the process of making a credit decision.

If there are 2 borrowers purchasing a home together, your lender will look at both sets of FICO scores and use the LOWER middle FICO score.

For example:

In the above sets of numbers Borrower 1's middle FICO score is 743 and Borrower 2's middle FICO score is 699.  Lenders will score the loan on borrower 2's FICO score of 699 since it is the lowest of the 2 scores.

Why is this important?

FICO scores determine how a lender prices your loan – pricing adjustments can impact your interest rate. A borrower with a FICO score of 740 or above will typically avoid many of the risk-based pricing adjustments investors like Fannie Mae impose on a loan.

If your FICO score is 699 and you are putting 20% down on your purchase, Fannie Mae (the investor that your lender will sell your loan to) will charge your lender 1.75% of your loan amount to purchase this loan.  This charge is passed along to you as part of your loan transaction and can be paid either by contributing 1.75% of the loan amount from your cash reserves, or by increasing your interest rate sufficiently enough to use premium pricing to cover the fee.

A borrower with a FICO score of 740 is charged only .25% for this fee, a savings of 1.5% of your loan amount.

The numbers might look like this (example only):

As you can see, a higher FICO score can save a borrower $4,800 in closing costs just by having a higher FICO Score.

This is only one example of how your credit score can affect your ability to become mortgage ready.  However, it is very important that when you start thinking about purchasing a home, you start the process by calling a lender to check your credit and receive guidance on how to improve your scores, if needed.

This is a service most of us are willing to provide as part of helping our clients become eligible for the best rate and fee structure available.

If you would like more information about your credit and how it will affect the way you become mortgage ready, please give me a call at (714) 403-2603 or send me an email message to Linda@LindaOnLending.com.