How Credit Scores Affect Your Mortgage

By
Mortgage and Lending with HOPE Lending LLC

Buying a house can be a fun yet daunting task. Most of the anxiety is caused by the loan application process. Most people today can't afford to pay cash for their houses so the loan process is one we can't avoid. And the loan process itself has become a very complicated and drawn out process.

The two major unknowns of the loan process are whether you will get approved, and at what percentage rate. Both of these depend primarily on your credit. The better your credit, the better your chances for an approval at a low rate. But what exactly is good credit? What's the difference between A credit and A- credit or even B credit? Good question. Every bank has its own rules and definitions. That's where credit scores come in.

A General Guide to Credit Grades

  Credit Debt MaxMortgageRevolvingInstallment
Credit RatingScoreRatioLTV306090306090306090
PrimeA+72035%100%000000000
A-70045%100%000000000
SubprimeB68045%95%100100100
C66045%95%210210210
D64045%90%321321321
Hard MoneyE62045%70%432432432
  
Bankruptcy/Foreclosure/Notice of Default 
A+None allowed in past 10 years 
A-Minimum 2 years with re-established credit 
BMinimum 2 years with some lates 
CMinimum 1 year 
DDischarged, 1 day out of 
EPossible current          

The figures shown here are estimates. When trying to figure your credit grade, keep in mind the following principles:

  • Other Things Being Equal - When your have derogatory credit, all of the other aspects of the loan need to be in order. Equity, stability, income, documentation, assets, etc. play a larger role in the approval decision.
  • Worst Case Scenario - When determining your grade, various combinations are allowed, but the worst case will push your grade to a lower credit guide. Mortgage Lates and Bankruptcies are the most important.
  • Going Once, Going Twice - Credit patterns are very important. A high number of recent inquiries and more than a few outstanding loans may signal a problem. A "willingness to pay" is important, thus late payments in the same time period is better than random lates as they signal an effort to pay even after falling behind.

The reasoning behind credit scores

Lenders needed a way to simplify the loan approval process. They wanted to make it more streamlined, (to reduce costs) and more impersonal (to avoid lawsuits). To solve this problem a company called Fair Isaac developed a credit risk model based on thousands of credit histories. The Fair Isaac Model called FICO was the first credit scoring system to hit the mortgage industry.

The FICO score is a number between 350 and 850 that tries to determine how much of a credit risk a consumer is. The higher the score, the less risky.

In the early 1990's, Fannie Mae, (FNMA) started requiring credit scores on all loans submitted to it for purchase. FNMA is the company that buys mortgage loans from lenders and banks. Therefore, most banks and mortgage companies need you to qualify for a FNMA loan so that they can sell your loan to FNMA. Ask your loan officer for more information about how the primary and secondary mortgage markets work.

FNMA decided that 620 was the cutoff credit score. They would not buy the loan of anyone with a score below 620. They consider that loan too risky. That loan then becomes harder to sell on the secondary market and this causes the rate for the borrower to go up.

What are your credit scores? Ask me and we will obtain your reports.

How the score is calculated

There are three major credit bureaus. Equifax, Experian, and Trans Union. Each of them has a file on you, meaning they each have a credit report available on you. Each of them also has different information on their reports about you. And each of them has their own credit score based on their information.

That means that you have 3 credit reports and 3 credit scores. Equifax uses a score called Beacon, TransUnion's is called Empirica, and Experian uses FICO.

Depending on what information is being reported by which bureau, your score could vary drastically from bureau to bureau. I have seen clients of mine have a score of 700 in one bureau and 595 in another bureau.

Lenders have gotten around this by saying that your middle score must be at least 620 to qualify for FNMA financing. For example, if your scores are 650, 635, and 619, you would qualify because your middle score of 635 is above 620.

How they come up with scores

The process of determining the scores is a very difficult mathematical calculation.

They take dozen of items into account. In fact, the bureaus do not even reveal the equation they use.  They keep it very secret. Until very recently, no one except the bureaus themselves was even allowed to tell you what your score was. You could be sitting across the table from your mortgage broker and he was not allowed to tell you what your score was even if he had it in his hand! This has since changed, but the bureaus still want you to come to them first.

Basically, every piece of bad information on your report lowers your score. Major bad listings are collections, bankruptcies, consumer counseling, and foreclosure. Pretty bad listings are late payments. Bad listings are inquires, too high balances, and too many accounts.  The computer then takes all this information and calculates a score to determine how risky you might be.

How to improve your score

Improving your credit score is the same as improving your credit. Here are some ways you can improve your credit score in a short amount of time.  Before making any changes, I suggest a free consultation with me.  Sometimes doing some of the things below can also hurt your credit.  It depends on your specific situation.

- Stop applying for credit - no more inquires

- Pay down or payoff your credit card balances - keep balances at or below 30% of the limit.

- Consolidate student loans

- Consolidate as many other loans as you can

- Have any incorrect information on your credit reports removed

- Analyze if you should close accounts you do not use - it is ideal to have only 3 major trade lines

- Lower your payments on fixed payment loans like your house or car by refinancing.

If you have negative information on your report that you cannot remove, the bureaus say the best way to improve your score is to let some time go by. The older the negative information gets, the less important it becomes in the credit score mathematical equations.

The future of credit scoring

Credit scores are now being used in many more places then just the mortgage approval department. Credit card companies, banks, and even insurance companies accept or reject applications based on credit scores. Some people are starting to protest the use of credit scores in certain industries like insurance. But the benefits of credit scores outweigh the negatives, at least as far as lenders are concerned. So I see credit scores becoming more main stream. It will get to the point, if it is not already where applications will be accepted or rejected solely based on the credit score. And that is why it is so important that you make sure yours is as high as it can be.

At HOPE Lending we take pride in Trust that is Earned and Value you can Count On.

HOPE Lending

 

 

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Rainmaker
215,790
Wayne and Lynda Gomillion
Real Living Hagan Realtors | Pinehurst ~ Southern Pines, NC - Pinehurst, NC

 Thanks for the enlightening post!

Jun 09, 2007 12:14 PM #1
Rainer
33,856
Melissa Olson
HOPE Lending LLC - Bellevue, WA
HOPE Lending LLC

Hello Wayne and Lynda Gomillion,

I'm glad you like it!  Thanks for commenting. 

Jun 09, 2007 12:21 PM #2
Rainmaker
662,099
Patricia Aulson
BERKSHIRE HATHAWAY HOME SERVICES Verani Realty NH Real Estate - Exeter, NH
Realtor - Portsmouth NH Homes-Hampton NH Homes

Great post. I have a print out of the subject for all my buyers, first tim or last time.  Many people don't realize the credit score does truly effects your rate.

 

Patricia Aulson/Lic. NH/ME/MA 

Jun 09, 2007 12:22 PM #3
Ambassador
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Melissa.... this was a very well written post. You put a lot of great information in this post, explaining everything from the actual score, to what affects the score. I also liked your explanations on how to raise your scores. Again, great job.

                                                                                                              jeff belonger

Jun 09, 2007 12:22 PM #4
Rainer
33,856
Melissa Olson
HOPE Lending LLC - Bellevue, WA
HOPE Lending LLC

Hi Jeff,

Thank you for the comment.  I wrote this a while back and provide it to my clients.  I appreciate your thoughts considering you are an expert in our industry.  My hope is to hear what others think about what I write to make improvements if need be.

Jun 09, 2007 12:28 PM #5
Rainer
33,856
Melissa Olson
HOPE Lending LLC - Bellevue, WA
HOPE Lending LLC

Hello Patricia,

Yes, I SO agree!  It seems so simple I often wonder why this isn't being taught in High School.

Jun 09, 2007 12:31 PM #6
Ambassador
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Melissa, my pleasure. The only thing that I might add is giving them a better idea on what percentage of their max credit limit used will affect their credit. I don't know the numbers exactly, off the top of my head. But having a balance that is 60% of your credit limit or higher can hurt your scores. What hurts the most is when almost maxed out.

                                                                                                             jeff belonger

Jun 09, 2007 12:33 PM #7
Rainer
113,491
Provadus Home Loans
Provadus Home Loans - Marietta, GA
Technology bringing you home.
Great reference for everyone!  This is an incredible guide for relatively new LO's and client's who do not understand how credit really works.  Well done!! 
Jun 09, 2007 12:35 PM #8
Rainer
119,269
Rob Robinson- Lehigh Valley PA
Bertrum Settlements (Title & Abstract) - Allentown, PA
Excellent info.  This is what the public needs to understand.
Jun 09, 2007 12:54 PM #9
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Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life
Great compilation of info & resouces vital to pretty much everybody!  Excellent work, I'm bookmarking and giving the old 5 Star Salute!
Jun 09, 2007 01:09 PM #10
Rainer
1,051
Benjamin Nichols
Homelink Real Estate and Mortgage - Red Bluff, CA

This could be very helpful for explaining to borrowers how important there credit scores can be, and it's good to know ways to improve your credit score, or keep it from dropping.  Thanks for the info.

Jun 10, 2007 03:30 PM #11
Rainer
2,590
Taurus Monday
Coldwell Banker Cascade Realty - Douglasville, GA

Melissa,

Thanks so much.  This information is great! 

Jun 10, 2007 06:09 PM #12
Rainer
33,856
Melissa Olson
HOPE Lending LLC - Bellevue, WA
HOPE Lending LLC
Ambassador
749,666
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Melissa.... thanks for sharing these letters. This can be a great help for so many.

                                                                                                              jeff belonger

Jun 10, 2007 11:16 PM #14
Rainmaker
468,727
Alexander Harb
Knights Investing - Mesquite, TX
Dallas, Texas Real Estate Investing

LOTS of great info for the future...... thanks for posting these standards!!

=-)

Jun 11, 2007 01:34 AM #15
Rainer
33,856
Melissa Olson
HOPE Lending LLC - Bellevue, WA
HOPE Lending LLC

Kris Krajecki wrote on my post Credit Dispute Letter that these are being sold on Ebay.  I've only been a member a few days, but hope to see more information like this out there for us all to use.

Jeff & Alexander - Thanks for commenting. :)

Jun 11, 2007 09:52 AM #16
Rainer
33,856
Melissa Olson
HOPE Lending LLC - Bellevue, WA
HOPE Lending LLC
Jun 11, 2007 10:06 AM #17
Rainer
100,676
Cheri Smith
Prudential Gary Greene, Cypress TX - Cypress, TX
Realtor Prudential Gary Greene
Very good information. I fell for the consumer credit counselling hooplah and joined and paid my debts through them for 2 years and then took it over myself. Some still say they are being managed by a counseling agency and I can't seem to get that changed. The credit bureaus sure don't make life easy sometimes. Had I known that it actually looked bad to join the credit counseling agency I would not have done it, but I was drawn in by the fact that they could get my interest rates lowered. I've since been educated but it was a hard lesson to learn!
Jul 17, 2007 07:32 AM #18
Rainer
33,856
Melissa Olson
HOPE Lending LLC - Bellevue, WA
HOPE Lending LLC

Hello Cheri - Have you tried getting written documentation from the counseling agency that their service is ceased?  Or have you tried writting a dispute letter to remove them from your report?

All the best!

Jul 17, 2007 09:05 AM #19
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