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