Three Ways That Your Credit Score Affects Your Mortgage (and Your Chance of Obtaining One!)

If you’re thinking of buying a home, you’ve probably been thinking a lot about your credit score as well. Credit scores control so much of what we do in the world of finances, but what does your credit score really have to do with your mortgage? Here are three ways that your credit score could impact your mortgage application.

Your Credit Score Affects Your Ability To Get A Mortgage

The first thing your credit score tells a lender is whether they should lend to you at all. In some cases, if you have a very low credit score, you may not be able to obtain a mortgage at all.

Different lenders will have different criteria for determining safe and unsafe lending situations. Typically, if you have a score below the 600 mark, you’ll have trouble obtaining a mortgage.

If you’re worried about a low credit score, don’t despair – you can still get a mortgage, you just might have to work a little harder to get one. Some lenders will still lend to people with lower credit scores (just make sure you’re approaching legitimate lenders and not mortgage scam artists). Or, if time is on your side, you can work toward building up your credit score so that when it comes time to take out a mortgage, your score will be more appealing to lenders.

Your Credit Score Affects What Types Of Mortgages You Can Obtain

The second thing a lender learns from your credit score is which types of mortgages you qualify for. If a lender sees you as a higher risk, they won’t necessarily be willing to offer you just any old mortgage.

In most cases, if you have a credit score of less than 620, you won’t qualify for a conventional mortgage. In addition, if you have a lower credit score, you may have to make a larger down payment in order to qualify for the type of mortgage you want.

Your Credit Score Affects Your Interest Rate

The final thing that a lender learns from your credit score is what type of interest rate they’re willing to offer you. As a general rule, the higher your credit score, the lower the interest rate.

However, just because you have a high credit score, that doesn’t mean you’ll automatically get a great mortgage rate. There’s more that goes into the price of a mortgage than just the interest rate, so watch out for additional factors like extra fees, mortgage insurance, lock-in periods, and so on.

Your credit score tells a lender a lot about what type of borrower you are. Ultimately, a higher credit score means that you’ll be able to borrow money at a lower interest rate. But if your score is low, don’t worry – there’s a lot you can do to bring up that score before you apply for a mortgage, so don’t throw in the towel just yet!

Every financial situation is different, so if you want to find out more about how your credit score will affect your mortgage in your specific circumstance, talk to your mortgage professional.

Understanding Your Credit Score And How It Impacts Your Home Ownership Prospects

Understanding your credit score and how it impacts your home ownership prospects your credit score is an important part of your financial profile. It has a direct impact on your ability to take out loans.

The score itself is a numerical reflection of your credit history. It gives lenders a way to discern your reliability before approving a loan like a mortgage for instance.

Though this is the basic function of a credit score, it can also have a far-reaching influence over other aspects of home ownership.

Mortgage Loan Approval: Will Your Score Make the Cut?

First and foremost, the status of your credit score is a deciding factor in whether or not you are approved for a loan.

Even if you put down a large down payment on your home, a low credit score can still cause the loan to be rejected. For this reason, it’s best to wait until you’ve built up a good credit score before looking to purchase a house.

Mortgage Interest Rates: The Lower The Score The Higher The Rate

High interest rates are another reason to hold off on purchasing a home until you’ve obtained a very good credit score. While applying for a loan with the minimum credit score required might get the loan approved, it also means having to pay higher interest rates.

Shooting for a credit score above the bare minimum before applying for a mortgage will increase the likelihood of receiving a much lower interest rate. A higher credit score demonstrates a credit history of timely payments and the ability to successfully pay off debts, which are key factors in mortgage approvals.

Homeowner’s Insurance Approval And Premium Rates

An insurance broker running a credit check might seem a little out of the ordinary, but in actuality when is comes to home insurance, companies frequently run credit checks on prospective clients. When an insurance company inquires about your credit history, all they receive is your credit score and nothing more.

The nitty-gritty details of your credit history remain private. So, why are insurance companies running credit checks in the first place? Credit scores are an integral part of the scoring system they use to determine premium rates for each client.

Though your credit score might seem irrelevant in determining how likely you are to file an insurance claim, the industry argues that there is a documented connection between those who are more likely to file insurance claims and the lowly state of their credit scores. This trend has led insurance providers to offer higher insurance premiums to those with lower credit scores.

In some cases companies may refuse to insure a client based on a poor credit rating. Credit scores have a profound influence over financial transactions. You ability to make a large purchase like a new home can be severely hindered by a poor credit score.

If you have a low credit score, consider taking some time to repair your credit history before applying for large loans. Correct any lingering errors on your credit report and get into the habit of making consistent, timely bill payments.

Addressing these issues could dramatically improve your credit score in a year’s time, putting you in a much better position to tackle home ownership.

How To Improve Your FICO Score

The U.S. housing market recovery is underway. New home sales are at a multi-year high, housing starts are at pre-recession levels, and home builders plan for a strong 2013.

Since late-2011, falling mortgage rates have boosted buyer purchasing power. Now, today, in many U.S. markets, the number of active home buyers outnumbers the number of active home sellers. It’s among the reasons why home supplies remain scarce and why home prices are rising.

Roughly 20 percent of today’s home buyers purchase homes with cash. For everyone else, the ability to gain mortgage approval depends on income, assets, and, most importantly, credit scores. Your credit score is a predictor of your future payment performance and lenders pay close attention. 

If you plan to buy a home in Ft. Walton Beach or anywhere else in the next 12 months, spend some time with this The Today Show interview. It’s five minutes of practical credit scoring advice, including separation of credit score myth from credit score fact.

Among the credit scoring tips shared :

• How to get your credit checked without harming your credit score
• The value of using automatic payments with credit cards
• How to use “old” credit cards to boost your credit score

You’ll also learn about utility companies and why you should never be late with payment.

As compared to August 2011, last month’s average, mortgage-financing home buyer’s FICO score improved 9 points to 750. The average “denied” mortgage applicant’s FICO score was 704. Clearly, standards are high. However, credit scoring is a system and, with time, you can improve your rating. 

Watch the interview and find ways to make your credit score better. With better credit comes better mortgage rates.

10 Real Estate Deal Killers

I attended a class the other day called “10 Things to Ask Your Buyers Before Taking Them House/Condo Hunting” and will be addressing those issues in an upcoming blog entry but wanted to put together a list of what can kill a deal for a buyer or a seller. Please feel free to share this information with your buyers and sellers!

1.  Skipping the Mortgage Preapproval Process: For buyers, getting preapproved for a mortgage gives them a clear idea of how much they can safely borrow, plus it addresses credit issues and kick-starts other financial paperwork. What’s more: it identifies them as a SERIOUS BUYER. With mortgage guidelines changing almost daily these days, a buyer needs to be 100% sure that they can afford the down payment requirements and meet the credit score requirements of a particular property type. Sellers with a hot property should demand nothing less than proof of preapproval from the potential buyer’s lender (hopefully it’s Northstar Mortgage!) There is no sense in wasting time on time wasters! I know most Realtors require their clients to get preapproved prior to ever showing them the first house but I also know Realtors who spend sometimes months showing prospective clients properties, taking them to lunch and/or dinner, searching the MLS for them and then find out that the client cannot get approved for a mortgage at all! On top of having spent countless time with an unqualified prospect, the Realtor has also spent money on them. IF A CLIENT IS UNWILLING TO GET PREAPPROVED, HOW SERIOUS CAN THEY POSSIBLY BE??

2.   Not Knowing What a Condotel is: As Fannie Mae, Freddie Mac, FHA and VA tighten up their credit guidelines, they have basically choked the ability to do a fixed rate mortgage for a condo in a resort area. If you have a client that is buying a condo and you can go on Google, put the name of the project and the city in, and find that you can rent a unit in the project for a day or for a week, chances are you seller will NOT be able to get a fixed rate mortgage to buy a unit in that project as it will be considered a “condotel” or “condohotel”. If the HOA has 10% – 15% (depending on the investor) or more of the units in the project as delinquent on their dues, it makes the financing in that project even that much more difficult. If the project has the word “Resort” in the legal name of the project, it is a condotel. Here in our local market in the Panhandle, one or all of these affects about 99.9% of the condo projects! Before you show condo units to a prospective client, MAKE SURE THEY ARE AWARE THAT THE AVAILABILITY OF A FIXED RATE MORTGAGE IS ALMOST NON-EXISTENT! While we are able to finance condotels with several investors utilizing adjustable rate mortgages, you would be very surprised at how many calls A DAY I get from clients who are at contract on a unit and then find out that they can’t get a fixed rate mortgage. You would be doubly surprised at how many of them end up not buying at all! (It’s currently noon as I am writing this and I have already had 5 of these calls today and in all cases: they were at contract and talking about not buying.) The investors we use do NOT require a condo checklist so it’s sort of a “don’t ask, don’t tell” policy on the HOA dues. If your client knows up front that they can get a mortgage and the type and terms of the mortgage, they are more apt to buy a unit as opposed to finding out after they find the perfect unit. The prices and deals on condos right now are so incredibly good that some people don’t care that they have to do an ARM but if they find out after the fact, it sours them and causes them to take pause and possibly not buy!

3.   Not Understanding the Length of the Buying/Selling/Financing Process: I have no idea what the numbers are, but there is a high percentage of real estate being sold that is either a short sale and/or REO that have to be approved by the bank currently holding the note. This process can take as little as 3 weeks or as long as 3 months (and even longer) and sometimes, buyers lose their enthusiasm. Make sure your client knows going in that buying one of these properties (or selling one, if you are the listing agent) will not happen overnight. If they know up front, it doesn’t create a fear in the buyer or seller because it takes longer than they may have expected. On the financing side: because rates have dropped to almost historical lows, most underwriters are taking more time to get files underwritten than what it used to take. Talk to your loan officer and get a realistic idea of how long it may take (I have heard of some underwriters taking 5 to 6 WEEKS to underwrite files based only on the sheer magnitude of the number that they have received recently!!!)

4.  Assuming the Appraisal Equals the Actual Value: In theory, appraisals are objective estimates of value. But several different appraisals can yield several different numbers. For example: an appraisal that’s been done for a possible refinance may have been slightly inflated to encourage that refinance. So make sure that, as sellers, when a house is put on the market the agent do a CMA to better indicate the home’s worth. As a buyer, get similar comps from your agent! But realize that the TRUE VALUE of a property is what someone is willing to pay for it. There is no emotional value added to an appraisal.

5.  Exposing Your Hand During Negotiations: Buyers should never let their love for a house cloud their vision. They need to try to contain their enthusiasm. Otherwise, the sellers and/or their agent will know they’ve hooked a live one and assume you may forgive certain flaws because they think a particular property is right for them. Also, I always suggest to my clients that when they make an offer on a home that they tell me the amount and I will send a preapproval for that exact amount. If a client is preapproved for $200,000 but is offering $179,000 for a house that is listed at $190,000, they are giving the seller an unfair advantage in knowing that they can afford more!

6.   Opting to Use An Agent That is a Friend of a Friend or a Family Member (aka: choosing the wrong agent): Buyers and sellers should interview several agents from small and from large firms. Get references and success stories. Opting for a friend or family member who is a Realtor doesn’t assure one of the best results in all cases and it could cause a rift. Choosing an agent who suggests the highest list price is not a recipe for success and neither is opting for the agent who charges the lowest commission. Remember that the following qualities in a Realtor will usually get the job done right: smart, empathetic, experienced, dedicated and one that pays attention to a buyer’s list of wants and needs in a house!

7.  Not Realizing The Other Costs Involved in Homeownership: If a client is preapproved for a mortgage with a lender, that preapproval is based on their gross, not net, income. This means that they may can qualify for a payment that is higher than they may want to spend. Mortgage lenders do not take into consideration, unless it’s a VA loan, the cost of lawn maintenance, utility bills, groceries, insurance, childcare, pool maintenance, entertainment, gas, auto repairs, etc. Just because a client can afford $1,500 a month doesn’t mean that they should buy a house that uses all of that to pay just the mortgage payment. Because today’s largest pool of buyer’s are first time homebuyers, it is very important that the Realtor explain all of the other expenses that the client may not realize will be involved with owning a home! Opting for a dream home that may otherwise create negative quality-of-life challenges (ie: longer commutes, higher taxes, bad schools) can cause buyers to question their decisions after a few months. If a buyer purchases a home and finds that the other expenses involved causes them to lose that home or not be able to afford to do much else (house poor), how many referrals do you think they will give you??!!

8.   Not Knowing What They’re Signing: The sales contract is a legally-binding document. Buyers and sellers should review it as if their legal well-being were at stake (because it is!). It should address all concerns of both parties, such as who will pay what for closing costs and repairs. A poorly written or incomplete contract can cost time, money and emotional energy and tie up a deal for weeks or months. If there have been any oral commitments, they should be put in writing. Also, realize that just because a house is being sold “as is” per the contract, most lending programs will not let a property close that has certain repairs necessary if they are pointed out on the appraisal (ie: roof leak, exposed wiring, etc.) Always address a dollar amount of repairs that a seller is willing to pay on the contract instead of leaving it blank to make sure that the house makes it to closing.

9.  Not Paying Attention to The Good Faith Estimate: As mortgage lenders and brokers, we are all required to give a client an estimate of the costs involved in the closing of the property. In fact, we are required, BY LAW, to give this to a client no later than 3 days after they make loan application. As a Realtor, go over the estimates with your client! There are unscrupulous lenders and brokers who will intentionally leave certain costs off (ie: escrows) or intentially underestimate the cost of other items (ie: taxes, insurance, title company fees) just so that a client will go with them and then the client finds out too late (at or immediately prior to closing) that they have to bring more money to closing than they initially thought. What do you suppose happens if the client doesn’t have the additional money to pay these fees??

10.   Waiting for Prices to Go Down or For Interest Rates To Drop (aka: timing is everything, but maybe not in the sense you’re thinking): Right now, mortgage interest rates are at or very close to historical lows. Housing prices have decreased, as well. I read an article that indicates that we are very close to reaching price stabilization. Once that is reached, prices will start to increase. Mortgage rates may go a bit lower, but there is always a chance that they will increase. If a buyer is hoping that the price or rate will drop and either one goes the other way, it will end up costing them. How do you know the bottom is reached until it is too late? Buyers need to get the psychology of “what is my interest rate” out of their head and look at the monthly payment – that is what you write a check for every month! Increasing rates and decreasing prices can cause a mortgage payment to be higher than what it may have been at a higher price! If you have a client looking for to purchase real estate, find out what PAYMENT AMOUNT they feel comfortable with and work back from that instead of calling your lender to ask “what’s the rate”. Rates these days are contingent on exact credit scores in most cases and while someone with a 740 credit score may be getting a rate of 5.25%, a client with a 650 credit score may end up with a rate that is 1-1.5% higher than that! It’s not about the rate – it’s about the MONTHLY PAYMENT!

I hope that this list offers you some insight into those things that we see that make buyers and sellers upset and can cause them to change their mind about buying or selling real estate or referring their friends, family and coworkers to you in the future. If you are working with any buyers in Florida, Alabama, Georgia, the Carolinas or Tennessee, or are looking to purchase real estate in any of those states, I would love the opportunity to work with them and insure that your deal gets to closing and, if it’s not doable, not hesitating to tell you up front!