Understanding the Credit Score and Mortgage Relationship
In the 1960s, the concept of credit scores came to fruition. A company by the name of Fair Isaac Corp developed a system whereby credit reports could be summarized as a score. This score, known as a FICO score, could be used by lenders to determine the credit worthiness of a potential borrower. The highest FICO score you can have is 850 while the lowest is 350. Where you fall on the scale determines the type of loan you will get.
Cutting the chase, a credit score is a factual summary of your credibility. What it tells a lender is how you have behaved from a financial perspective over a period of years. If you have regularly missed credit card payments, the lender is going to consider it an indication you will be likely to miss mortgage payments as well. Obviously, that is going to result in a denial of your loan application or vicious terms in the lender’s favor.
As you might image, your credit score impacts both the approval and terms of your home loan. The higher your score, the better position you will be in. While a score above 800 is considered perfect credit, almost nobody has such a FICO score. In fact, most lenders wouldn’t believe such a score and would probably take extra steps to investigate it.
Most people seem to fall in the 500 to 600 range. While this may suggest problems in dealing with a lender, it doesn’t. Lenders rarely expect to see perfect credit scores for borrowers. Instead, they expect to see flaws. The approval and terms of your loan all come down to the shades of grey in your score and how lenders interpret them.
When evaluating these shades of grey, lenders do so on a risk basis. Generally, a score of 720 to 850 is considered excellent, while a score of 500 to 560 is considered high risk. 560 to 620 is not great, but 675 to 720 is fair to good. 620 to 675 is considered average. Importantly, there are lenders that will provide loans for each of these ranges. Your particular score is really only an indication of how good or bad a deal you will receive.
If you have a high credit score, you should negotiate hard for the best possible deal on your mortgage. If your credit score falls in the 500 range, you are pretty much going to have to accept whatever you can get.
Simply put; your credit score is the primary information used by banks in deciding whether it's worth the risk of lending money to you. After all, that's what banks do when they offer you a loan: they make a gamble on whether you will be able to repay their money. If you pay back the money on time (with a little interest on top) the banks have won their gamble. If you default on the loan and the banks have to take you to court or pay a collection agency to recover their money, they lose the bet. It's as simple as that.
So how do the banks get hold of your credit score? Banks and other money lenders can purchase your credit report from the credit bureaus that make them. Every time you apply for a loan, take a credit card, open a new bank account or do any number of things related to finance, the bank will take a look at your credit report to assess your ability to repay the money you want to borrow.
Because of all this, it is vital that you make sure you can repay any money you have borrowed ? in full and on time. If you find yourself falling behind in your repayments it will affect your credit score, and the next time a bank takes a look at your credit report they might decide that you're not worth the gamble.
Both Dan Lewis & Ken Charnley are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Dan Lewis has sinced written about articles on various topics from Mortgage, Finances and Business and Finance. Dan Lewis is with Great Western Mortgage - provided by San Diego Mortgage Brokers. Great Western Mortgage is a. Dan Lewis's top article generates over 18100 views. to your Favourites.
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