Credit scores (FICO scores) are a number based on a formula that summarizes someone's credit accounts, debt ratio and payment history.
And that number really matters when someone applies for a loan.
Credit scores don't just determine someone's ability to qualify for a loan. Credit scores will drive the terms of the loan, including the required down payment and interest rate.
Disclaimer: I am not a mortgage broker. I am a real estate broker. That said, it is hard to do what we do for a living without a basic understanding of home mortgage loans. The information presented here was gathered from conversations with loan officers and various searches of home mortgage and credit agency web sites and is being shared here as a starting point for you to understand credit scores and loans. Further consultation with a professional mortgage loan officer is recommended.
Credit Scores range from 300 to 850 and generally speaking, the higher someone's score, the more money they will be approved to borrow (providing they have the income to afford the payments) and the less interest they will pay over the length of the loan.
The general range looks like this:
According to the agencies, this is what they look at to determine score:
Credit Scores can drop if a borrower applies for several loans, credit cards or lines of credit all at once — a sign of potential financial trouble. That is why lenders instruct borrowers NOT to buy a car or open a new credit card account while a new home loan is being reviewed in underwriting.
Shopping for (and comparing) mortgage rates from multiple lenders typically will not affect scores (if all inquiries are within 6 weeks).
The best way to achieve a higher score, or improve a lower one, is to:
Advise your buyers that they can get a free copy of their credit report from each of the three major credit agencies once a year. They can order it through AnnualCreditReport.com, which is the only authorized online site under federal law. To access credit scores more than once per year, there will typically be a charge. Search www.Google.com for "credit report". There are dozens of sources. Some will be free, others will charge a small fee.
When it comes to qualifying buyer clients for a mortgage, credit scores are a huge factor. Use this information to help your client understand the importance of their score and how it is used to provide pre-approvals.
To your success,
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