February 5th, 2014 4:52 PM by Robin Bain
Why Your FICO Score Matters for
interest rates that mortgage lenders usually offer are based off of a
consumer's credit scores (risk-based pricing). Credit scores are the lender's
indicator of risk of borrower default.
A credit score is a calculation which
measures the likelihood a consumer will allow a debt to become 90 days late or
more, or default on debt repayment.
However, risk is evaluated differently
by different lenders. This is where the “lender overlay” may come in. These
overlays are expanded guidelines for credit minimums on top of what Freddie
Mac, Fannie Mae, the VA or FHA would normally approve.
These overlay adjustments are often
added to mortgage loans with consumer credit scores of 680 or less. Below are
some pricing adjustment examples from the Fannie Mae
selling guide from January 8, 2014. All the examples are taken from
fixed-rate mortgages, and note that the minimum credit score for Fannie-backed
mortgages was 620 (exceptions to which are limited):
All Eligible Mortgages
(Excluding MCM): LLPA by Credit Score/LTV
< 60.00% LTV
60.01 to 70% LTV
70.01 to 75% LTV
75.01 to 80% LTV
80.01 to 85% LTV
85.01 to 90% LTV
90.01 to 95% LTV
720 to 739
700 to 719
680 to 699
660 to 679
640 to 659
620 to 639
Mortgage companies and lenders can
impose additional overlays. State first time home buyer programs will sometimes
have their own credit requirements. For instance, the State of Ohio first
time home buyer program requires a minimum middle credit score of 640.
How Credit Score is Calculated
How credit scores are calculated: FICO
scores are credit scores calculated by applying algorithms developed by the
Fair Isaac Corporation. They are a measurement of risk based on past credit
history and use of current credit. The TransUnion (one of the major credit
bureaus) FICO score, for example, ranges between 300 and 850. Credit scores are
updated every 30 days, to reflect your current credit balances, payment
history, and account status.
The TransUnion FICO score calculation is
composed of the following factors:
Past credit information is reported on
your credit report. Credit inquires remain on a credit report for two years.
Bankruptcies are reported for ten years, whereas revolving accounts and
installment loans are reported for seven years.
Recent credit activity has a greater
impact on credit scores than older, inactive accounts. One caveat to this rule
would be paying older collections. If a collection account has not been updated
in the past 2 years but is paid, it will likely have a negative impact on the credit
scores. The credit scores will likely decrease because, when the collection
account is updated it will be reported as recent activity.
Correcting Credit Report
Disputed accounts are not weighed into
credit score calculation. Most lenders require disputed accounts to be resolved
or the dispute verbiage be removed thereby reflecting a more accurate depiction
of an individual’s credit score.
Prior to applying for a mortgage, check
your credit report for disputes because you may have inaccurate credit scores,
which may be lower once the dispute verbiage is removed.
What else can you do
to improve your credit scores?
For additional information, we have
another guide for quickly boosting your score here: http://www.bainmortgage.com/YourFICOscore
for mortgage advice? We'll be glad to talk about our mortgage offerings! Give
us a call today at 978-422-2311. Want to get started? Apply
Welcome to Premiere Mortgage Services, Inc., where you’ll find the best refinance rates and a loan program that's best for you. We’re Robin and Dana Bain, and we provide New Hampshire and Massachusetts mortgage loans for home purchases and refinancing.