How Does My Credit Score Impact my Mortgage Application?

You want to purchase a home because the price is right and interest rates are low.  And while many experts predict the value of real estate will continue to drop, if you’re willing to buy and stay put for a while it might not be a bad time to take the plunge.  What role does your credit score play in the mortgage process?  The short answer…a huge role.

Since a home is THE most major purchase you’ll ever make and the length of time to pay a mortgage can be up to 30 years, a small difference in interest rates can make a large difference in the amount you pay over the life of your loan. The impact scores have on your mortgage is shown in this table below. It is based on a mortgage of $200,000 at a fixed interest rate for 30 years. To make it simple, real estate taxes and insurance have not been added.

Score         APR  monthly payment         total paid    interest

775            4.6%          $1021                 $367,560   $167,560

690            5.0%          $1069                $384,840   $184,480

620            6.2%          $1219                 $438,840   $238,840

At a score of 775 you get the best interest rate, which in this example is 4.6%.  Compared to the national average score of 690, the rate is 5%.  The difference in the monthly payment is $48 more per month or an additional $16,920 in interest over 30 years. At a score of 620, the rate is 6.2% with a monthly payment of $198 more than the best rate or $71,280 in additional interest over 30 years. This amount is substantial and you can see the impact of excellent versus mediocre credit.

A score of 620 is the lowest score you can have to qualify for a FHA loan. Below a score of 620, it is very difficult to get a mortgage because it requires manual underwriting, explanations of your bad credit, and you have to find financial institutions that will loan to you. You may be able to find some but are they reputable and what is the rate you pay?  In fact, you might be left with no options other than hard money lenders…who will charge you an arm and a leg to get the loan.

There are other items reviewed in the mortgage application process such as your income, assets and tax returns.  But, your credit score is first key item the lender will look at.  It is important to have good credit so that you save money in interest payments on major purchases.  I don’t want to be a broken record, but the best way to do this is to pay your bills on time, keep you balances low on credit cards, and avoid collections and public records.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

 

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