Understanding Your Credit Scores
Your Credit Scores Will Impact Your Interest Rate
Anyone who has bought a home can attest to the stress caused by the loan approval process. Once the closing is over, most purchasers feel a huge sense of relief. Often, the stress release of the closing finally taking place exceeds the joy of home-ownership itself. Understanding how your credit score impacts the loans available to you, as well as the interest rate you may receive, is one way for you to minimize the stress of the home buying process.
Understanding that today's economy and the elimination of "no income verification", "stated income" and other "liar loans" have left most borrowers with only one option: the "full-doc" show your income taxes, bank statements and proof of employment to the lender loan! In recent years, even those with great credit and verifiable income opted for the stated-income/stated-asset or no income verification loans because most people wanted to avoid the tremendous inquiry and scrutiny of the full-doc loan. One client actually said he preferred his colonoscopy to having to provide his tax returns and bank statements.
Basically, your credit score determines whether or not you will get approved and whether or not you will qualify for the best rate of interest if you are approved. In fact, the better your credit score, typically, the better the rate you will qualify for. However, every lender has its own definition of "excellent credit", although currently, most lenders adopt Fannie Mae and Freddie Mac guidelines as to what scores are attributed what ranking. Some call it A credit, A-, etc., while others in the industry call it Excellent, Good, Fair, Poor. For borrowing purposes, consumers are issued scores by a computer that uses a credit risk model based on thousands of credit histories.
Why Lenders Use Credit Scores
Credit scoring was adopted as a means for lenders to simplify the borrowing process. Lenders wanted to reduce the cost and risk of lawsuits associated with discrimination based loan denials. Now, lenders deny based upon your credit score. If your score is 550 and you are denied credit, you cannot argue that the computer denied you based on your race, religion, or any other reason. Additionally, the Fair Isaac company standard, commonly referred to as FICO scores, eliminated any personal involvement in the loan denial process. People can now say "you were denied based on your credit scores" and you cannot sue anyone. The Fair Isaac model was the first widely accepted credit scoring model used. Your credit scores can range from 350 to 850. Much like a Band-Aid describes the bandage applied to a cut, FICO is used to describe your credit score today. The higher your FICO scores, the better credit risk you are believed to be.
Generally, any score above 720 is currently thought to be excellent, although some lenders require a minimum of 740 to qualify for their best interest rates. During the subprime mortgage boom, it was not uncommon for people with scores of 680 or above to get the same rates as someone with a score of 780. Currently, a credit score of 680 and above is categorized as good, with 650 or more being fair. Scores below 650 will be charged extra percentage fees (rate hits to mortgage lenders). This means that if there is a 0.75% rate hit for having a 620 credit score, that if the best rate available is 5.00%, that the lowest rate someone with a 620 score will receive is 5.75, or 0.75% above the best rate.
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I am a New York Licensed Attorney at Law providing Wealth Building and Debt Elimination services through an innovative Life Planning practice where clients can literally transform their lives by designing a road map for their future!
