See your credit risk based on your credit score

See your credit risk based on your credit score

Minneapolis, MN: We all have credit scores, but do you know what your credit score tells creditors? It tells us your credit risk, and likelihood of the money not being paid back. 

Of course a high credit score is no guarantee of being paid back, just like a bad credit low scores are not a guarantee of default, but creditors have plenty of historical data to give us an idea.

Most lending is based off  what is know as 'risk based pricing', which simply means the lower your credit score, the higher risk of default, and the higher interest rate you pay for that risk.

Lenders Odds For Mortgage Late Payment Risk

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  More Than Just A Credit Score

  Other factors can come into play to help a lender mitigate risk.

  Amortization period. For example, a 15-year loan is a lot less risky than a 30-year loan

  Loan-to-Value (Down payment size). A smaller down payment is significantly more risky than a large down payment.

  So someone with a lower score, but putting a bigger down payment selecting a 15-year loan might get a loan approval, while someone with the exact same credit score using a small down payment and a 30-year loan might get denied.

  The 5 C's of Credit

  The basic framework for understanding, mitigating, and measuring risk are known as the 5 C's.  Here is what the 5 C's mean:

  Character

  What kind of person are you?  Do you have a long documented credit history?

  Capacity

  This is about your ability to take on debt, also known as debt-to-income ratio's.  Someone successfully paying rent for $2000 a month for years has documented the capacity to pay a $2000 a month mortgage payment. Someone who has lived rent free, and now suddenly has a $2000 a month house payment would suffer from 'payment shock'.

  Capital

  This is generally defined as overall wealth. How much money do you have saved, how much will you have after down payment.  Clearly someone with plenty of money left in the bank for example has the ability to make payments for awhile if they had a job loss, whereas someone living month to month would immediately be in trouble.

  Collateral

  In mortgage lending, this is the house itself, and very important. Lenders like traditional homes that are easy to resell if something were to happen, and why getting loans on fixer-uppers, and odd homes, like a berm or log home are more difficult.

  Conditions

  This one is more about the overall picture, and the purpose of the credit.  In mortgage lending, a good example is the difference between an owner occupied home, and a buying a rental property.

  The Bottom Line

  As you can now see, there is a lot more to getting a home loan than just your credit score, but also how important credit scores are, as well as your overall picture and profile.

  If you are thinking of buying or refinancing a home, our experts here at Cambria Mortgage, the Joe Metzler team are happy to provide a no obligation application review, along with a softpull credit report, which has no impact on your credit score.

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  Equal Housing Lender. NMLS 274132, 322798.  lends in the following states: MN, WI, SD, ND, IA, This is not an offer to lend or to extend credit, nor is this a guaranty of loan approval or commitment to lend. The information here may not be up-to-date and may no longer be accurate. Products and interest rates are subject to change at any time due to changing market conditions. Actual rates available to you may vary based upon a number of factors. Consumers must independently verify the accuracy and currency of available mortgage programs. All loan approvals are subject to the borrower(s) satisfying all underwriting guidelines and loan approval conditions and providing an acceptable property, appraisal and title report. (C) 2023 Joe Metzler. Original article posed on at See Your credit score risk factor - Cambria Mortgage, Joe Metzler