Understand Your Credit Ratings
Perhaps the most important element of obtaining a good rate on your mortgage
is your credit history. This section is designed to help you assess your
possible credit rating and what type of terms you can expect from a lender.
Equity
When you apply for an equity loan from lenders,
brokers or private investors the most important
factor is equity. In some cases it is only
equity that determines your ability to obtain a loan.
Before You Go Shopping
If you plan to "shop around" for a mortgage we advise that you take the time
to order your credit report from all three credit reporting agencies, and
distribute them to the lenders you wish to "shop" with. We advise this because
each time a potential lender pulls your credit, your FICO score goes down. In some instances
this can mean the difference between qualifying for a conventional mortgage (at
good rates) and a non-conventional at rates less favorable.
The three
major credit reporting agencies are:
- Experian - PO Box 2104 - Allen, TX 75013 1-800-682-7654
- TransUnion - PO Box 390 - Springfield, PA 1-800-916-8800
- Equifax - PO Box 105873 - Atlanta, GA 1-800-685-1111
General Guide to Credit Ratings
This is a general guide to what is called "A-B-C-D" credit. These grades are
typical of the requirements used by many lenders, but are not absolute grades.
Individual lenders typically have similar but somewhat different
specifications. Keep in mind that late payments, called "lates", are generally
tracked within the previous 12-month period.
-
A Credit
Considered the best credit rating. FICO scores are generally
620 and up with no lates on mortgage and no more than one 30-days-late on
revolving or installment credit. No bankruptcy within past 2-10
years. Maximum debt ratio is 36-40% while maximum loan-to-value
ratio is 95-100%. This type of credit will demand the best
interest rate available!
-
B+ to B-
General good credit with FICO scores from 581 - 619. Two or three
30-days-late on mortgage and two to four 30-days-late on revolving or
installment credit. Cannot have any 60 day lates. Must be 2-4 years since
bankruptcy discharge. Maximum debt ratio averages 45-50% while maximum
loan-to-value ratio is 90-95%. This type of credit will obtain rates 1-2% higher
than current market rate.
-
C+ to C-
Fair credit with FICO
scores from 551-580. Three to four 30-days-late on mortgage are allowed.
Installment or revolving credit can have four to six 30-days-late or two to four
60-days-late. Must have 1-2 years since bankruptcy discharge. Maximum debt
ratio runs around 55% with maximum loan-to-value ratio averaging 80-90%. This
type of credit will generate rates 3-4% higher than current market.
-
D+ to D-
Overall poor credit history with FICO scores from 550 and lower. Two to
six 30-days-late on mortgage or one to two 60-days-late, with isolated 90 days
late. Revolving and installment lates show poor payment record with pattern of
late payments. Possible current bankruptcy or foreclosure allowed with all
unpaid judgments to be paid with loan proceeds. Must have stable employment.
Maximum debt ratio averages 60% with max loan-to-value of 70-80%. This type of
credit will result in high interest rates (12-14%), but borrower can always
refinance after one year of "on-time" mortgage payments to bring rate down.
Please keep in mind these are "general" guidelines. Some lenders assign
different grades or use different grade definitions based upon their own method
of evaluation.
Always remember to check your credit report for errors once a year! It is
estimated that 50% of all credit reports contain errors significant enough for
an individual to be denied a loan!
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