February 5th, 2014 4:52 PM by Robin Bain
Why Your FICO Score Matters for Mortgage Application
The 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
Credit Score
_
>740
-.25%
0
0%
.25%
720 to 739
.50%
700 to 719
.75%
1.00%
680 to 699
1.25%
1.75%
1.50%
660 to 679
2.00%
2.50%
2.75%
2.25%
640 to 659
3.00%
3.25%
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 Inaccuracies
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
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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.