FICO Scores and Mortgage Interest Rates

If you want to take advantage of today’s low interest rates, you must qualify for your rates with attractive credit scores. High credit scores are earned through on-time credit payments, carefully managing debt, and keeping accounts in good standing, among other means.

Back in the 1980s, The Fair Isaac Company developed software that issues credit scores, a number that indicates your level of creditworthiness based on data gathered from creditors, landlords, tax bases, student loan lenders, and child support agencies, savings institutions, lack of credit and much more.

All three credit-reporting bureaus, Experian, TransUnion and Equifax use the software to determine your credit “FICO” score. It’s possible to have three different credit scores because the credit bureaus either have inconsistent data about you or they weigh your data a little differently.

Credit scores are a major short-hand tool bankers use to manage risk. They want to learn how much credit you use and how wisely, your debt-to-income, and if you have any defaults, liens, bankruptcies, judgments, etc. They look at your monthly obligations such as child support or alimony.

According to MyFICO.com, FICO scores range from 300 to 850, the higher the better.

• Payment History — 35%
• Total Amounts Owed — 30%
• Length of Credit History — 15%
• New Credit — 10%
• Type of Credit in Use — 10%

When you apply for a mortgage, the bank uses your social security number to look up your credit reports and scores. They base their decision to lend to you, plus how much interest they charge you, on your scores.

The best loan rates go to the borrowers with the best credit histories. As you can see from the FICO break-down, that most banks will be most interested in how much you owe and whether you pay on time.

You can get a loan with lower scores, but expect banks to require more money down, and to lower the amount they’ll loan you on a home so you can keep your debt-to-income ratio lower. And, they’ll charge you higher interest rates.

Rates that are advertised are typically for a benchmark 30-year, fixed-rate mortgage. These low-appearing rates are given to only the most credit-worthy homebuyers. What that means is that the rate is only available to those whose credit scores are high. High scores indicate high levels of responsibility, making the borrower a better candidate for a loan.

So if you want the best interest rate, take good care of your credit.

courtesy of:  http://realtytimes.com/consumeradvice/mortgageadvice1

 

Easier To Get a Mortgage?

Make no mistake: Mortgage credit is still very tight by historical standards, and only borrowers with the most pristine credit and healthy down payments can get the lowest rates. But there are signs that the noose is loosening, if only slightly, in response to lower mortgage volume.

Volume has fallen because rates are rising. Originations were down nearly 20 percent in the third quarter from the same period in 2012, according to Mortgage Daily.

Refinances are down more than 50 percent from a year ago because of higher rates, the Mortgage Bankers Association says.

The drop in volume has lenders looking for more business, however, and possibly easing up on some standards—or at least removing costly overlays on loans.

“New originations will be down, and nonprime borrowers will start to re-emerge,” said Tim Martin of TransUnion, which reported a 23 percent drop in borrowers’ making late payments in the third quarter versus a year earlier.

Since the recession began in 2008, the percentage of nonprime borrowers—or those with a Vantage Score lower than 700, according to Martin—has fallen from 12 percent of all originations to below 6 percent. That share is ticking up slightly.

“The origination volumes are starting to lower, so [banks say] let’s start easing up a little bit, take a little bit more risk and help some folks get some mortgages done,” Martin said.

After tightening in August and September, credit eased slightly in October, according to a monthly report from the Mortgage Bankers Association.

“Some investors reduced minimum credit scores on certain products,” the report said. “At the same time, other investors reduced the availability of cash-out refinances and limited other programs to primary residences in programs which previously allowed for second and investor homes. The net impact was a slight increase in the index for the month.”

That slight easing may again be just for the most creditworthy borrowers. Options for those with smaller down payments and lower scores are still limited.

D.R. Horton, the nation’s largest home builder, said the share of buyers using low-down-payment loans from the Federal Housing Administration is dropping, as the agency has raised its insurance premiums.

The entry-level builder, which reported fiscal fourth-quarter earnings Tuesday, said the share of first-time buyers dropped to 43 percent from 53 percent year over year. The average FICO score for a D.R. Horton buyer is 723—high by historical standards.

“We’ve not seen any significant changes in the underwriting standards to our customers” said Stacey Dwyer, executive vice president and treasurer of D.R. Horton. In terms of overall loosening, we’re not seeing anything significant,”

It is seeing effects from rising mortgage rates, however—a negative for home sales and refinances but a positive for credit availability as banks seek more business. Rising rates combined with rising home prices will sideline some buyers, especially first-timers.

It remains to be seen if the slight credit easing, though apparently not significant in the eyes of a major home builder, will help sales.

courtesy of:  http://www.cnbc.com/, Diana Olick.

How Your Credit Score Can Affect Your Mortgage Payment

When my wife and I bought our first home (circa 1993), we had no idea what our FICO score was. Back in the day, you couldn’t simply fire up the computer and check your score. In fact, we applied for our mortgage over the phone, not over the Internet. My, how things have changed!

But one thing hasn’t changed—the importance of a good FICO score when it comes to getting a mortgage. Not only will a good score help you qualify for a home loan, but it will also help you get the lowest rate possible. If you plan on taking out a mortgage—which almost all homebuyers do—understanding how your credit score affects your mortgage rate can mean saving thousands of dollars over the life of the loan.

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When you take out a home loan, you of course have to pay interest on the money that you are borrowing. The amount of interest you pay on a fixed rate fully amortizing loan is a function of three things: 1) the amount you borrow; 2) the term of the loan; and 3) the interest rate, which is expressed as a percentage. The mortgage rate you receive depends heavily on your credit score. For this reason, let’s get a basic understanding of your credit score.

Each of the three major credit bureaus (Equifax, Experian, and TransUnion) collect information on you about your practices of borrowing and paying back credit. This is compiled into a credit report, from which a credit score is calculated. While there are multiple formulas for calculating credit scores, the formulas introduced by the Fair Isaac Corporation are the most widely used. When you hear the term FICO score, know that FICO is short for Fair Isaac Corporation. All these scores can be a bit confusing, so it might be useful just to think of “credit score” as a numeric grade of your credit history.

Lenders consider many factors like employment, salary, savings, and debt-to-income ratio when they determine your mortgage rate. However, your credit score is a key indicator of the rate you will likely receive. Fair Isaac Corporation looked at thousands of financial lenders to come up with the mortgage rates provided to borrowers given their credit score. Let’s look at the credit rates for people with three different credit scores:

• Credit score of 620:  6.2 percent

• Credit score of 700:  4.8 percent

• Credit score of 780:  4.6 percent

Clearly, your credit score significantly impacts your mortgage rate. But let’s apply these scores to a real scenario to see how much a good credit score can save you and how much a bad credit score can cost you. Let’s say you are looking at a $250,000, 30-year fixed mortgage. If you have a credit score of 620, you are considered a riskier, subprime borrower. You will be making a monthly payment of principal and interest of $1,527, which amounts to $299,821 of total interest paid over thirty years.

If you have a better credit score of 700, you are considered a less risky, good borrower. You can expect to pay $1,313 monthly for a total of $222,689. If you have an extremely favorable credit score of 780, you fall into the top-tier range of borrowers, and lenders will very likely offer you a lower mortgage rate along with more loan choices. Your monthly payment will be $1,280 for a total of $210,681.

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As you can see, having a score of 780 instead of 700 does not make much of a difference in your mortgage payment. Over thirty years, the difference is about $12,000. However, having a credit score as low as 620 can cost you dearly. You will pay hundreds of dollars more each month and tens of thousands of dollars more over the lifetime of the loan. If you can improve your score, you can save tons of money. Specifically, if you raised your score from 620 to 700, you could save an extra $77,133. If you raised it even higher to 780, you could save $89,140.

Building a great credit score is extremely important to obtaining a good mortgage rate and saving boatloads of cash. Also, remember that although credit scores can reach as high as 850, you don’t need to worry too much about obtaining a perfect credit score.  Fair Isaac Corporation suggests that lenders don’t differentiate much between someone having a score of 720 and someone having a score of 820. Once you reach that score of 720, you will likely receive the lowest mortgage rates available. Start small, improve your FICO score, and bask in the mortgage savings that you earned.

Courtesy of:   money.usnews.com