Mortgages and Credit Scores

Today, credit scores plays a big role in determining whether or not your mortgage loan is approved and at what interest rate.  Obtaining a mortgage loan at an interest rate just one point less results in a savings of about $5,000 on the average 15 year mortgage, and significantly more on a 30 year mortgage (about $50,000).
 
Why do lenders use your credit score in their lending decisions?  Because they discovered that there is a direct correlation between your credit score and the odds of your becoming delinquent on your monthly mortgage payments. Consider the following statistics the mortgage industry has compiled:

If Your Credit Score Is
 
780  

700
680
660
645
630
615
600
585
Your Odds of Becoming 90 Days Delinquent are
 

Factors contributing to someone's credit score...
Factors contributing to someone’s credit score, for Credit score (United States). (Photo credit: Wikipedia)
576 to 1
288 to 1
144 to 1
72 to 1
36 to 1
18 to 1
9 to 1
4 to 1
2 to 1
As the above table illustrates, those with credit scores below 630 are not a very good risk, so they will obtain a mortgage at a significantly higher interest rate and this will add anywhere from $50 to about $250 to their monthy mortgage payment and add thousands to the price of the home.
 
If your score is 660 or above, you can get a mortgage loan fairly easily since you are a pretty good risk. As stated above, the higher your score the lower your interest rate, so your goal shouldn’t be to obtain a credit score of 660; it should be to achieve a credit score of at least 700.  Some lenders will reward you if your credit score is higher than 725, by lowering your interest rate by about 1/4th of a percent.  If it is between 700 and 724, it will be lowered by 1/8th of a percent.
 
Does an interest point or two make such a big difference in the price of the house?  You bet it does!  It means saving  thousands in finance charges and a lower monthly payment.  For example, paying an interest rate just two points higher means paying an additional $200 each month on your house payment on the typical $150,000, 30-year mortgage loan.  That’s at least $72,000 more you’re going to pay for your house!
 
There are steps you can take to raise your credit score or overcome a low credit score:
 
(1)  Offer a larger down payment so that you aren’t borrowing so much money
(2)  Lower your debt-to-income ratio by paying off as much debt as you possibly can before applying for a mortgage loan in order to increase your credit score
(3)  Don’t buy a car just before applying for a mortgage loan as it lowers your credit score
For a Kentucky FHA Purchase Loan, we can go down to a 620 credit score with the minimum down payment of 3.5%.  No bankruptcies or foreclosures in the last 2 years.

FHA Manual Underwriting

The minimum FICO for FHA Manual Underwrites is being lowered to 620

Joel Lobb
Senior  Loan Officer

(NMLS#57916)
American Mortgage Solutions, Inc.
800 Stone Creek Pkwy, Ste 7,
Louisville, KY 40223
 Fax:     (502) 327-9119
 
 Company ID #1364 | MB73346

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