Credit scores have always been important, no matter what a person was buying. They are more important now than ever; especially to someone considering a home purchase.
A recent study has shown that most people do not understand how credit scores are determined or how they affect them.
Credit Scores can save you money or cost you money. High credit scores can earn lower interest rates on some purchases while low credit scores may raise your interest rate dramatically or have the purchased denied.
It is no secret that the mortgage industry has tighten their lending guidelines considerably and credit scores will affect your ability to purchase more now than ever. However, your credit score is not the only factor a lender looks at when you apply for a mortgage loan.
Factors:
- Documentation
- Credit scores
- Debt-to-Income Ratios
- Risk-based Financing
Documentation: It is very important that you keep good financial records. Credit reports are not always correct. Be sure to keep receipts and documentation. You will need copies of at least two year's income tax records when applying for a mortgage loan.
Credit Scores: A credit score is more than just a payment history that affects about 35% of your total score. Your debt ratio also contributes highly to your total score by about 30%. Recent purchases also affect your total score (10%). The length of time of you have had credit is another factor (15%). Miscellaneous factors make up the final 10%. Credit scores range from 300 - 850. Most people fall in the 620 - 700 category. Those with credit scores of 700 and higher are considered to be strong borrowers, while anyone below 600 is considered to be a high risk borrower.
Debt-to-Income ratios: Mortgage lenders also take into consideration how much debt you owe in relation to how much you earn (gross earnings). This is called font-end ratios (house payment/gross income) and back-end ratios (other debt/gross income).
Risk-Based Financing: Although risk-based (paying certain fees or higher interest rates depending on your credit score) financing is nothing new, risk-based financing is not a new thing to the mortgage industry either. However, it is a new thing for FHA, Fannie Mae and Freddie Mac. FHA has recently implemented a new policy in which the mortgage insurance premium, paid by a borrower, is determined by their credit score. Beginning November 2009, Fannie Mae and Freddie Mac will be basing their loan fees on credit scores and loan-to-value ratios.
If you are considering a home purchase, it would be wise for you to consult with a lender as soon as possible. A skilled mortgage professional will be able to determine how current guidelines and the new risk-based pricing will affect your purchasing power as well as which loan product would be most advantageous to you.
Every borrower's situation is different. Do not make the mistake of assuming you can or cannot purchase a home.
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