Want a Low Interest Rate Mortgage or Refinance? Work on Those Credit Scores!
Posted on | September 27, 2010 | No Comments
When the housing crisis hit, banks responded in ways that were seen by most as “consumer-unfriendly.” Some sub-prime lending divisions were shut down virtually overnight – leaving consumers stranded in the middle of purchase transactions. In other cases, individual loans were rejected at the last minute.
Since then, real estate agents have been pounding their heads in frustration because so many of their buyers haven’t been able to get loans.
Even past clients who always got loans easily were being turned down. Part of the reason was the end to “no-doc” and stated income loans. That knocked out many of their self-employed buyers.
The next hurdle was falling credit scores. When banks issuing credit cards decided to reduce credit lines and close unused accounts, even the most credit-worthy consumers saw their credit scores plummet. When 30% of your score depends on your debt to available credit ratio, losing that available credit is devastating to your credit scores.
Meanwhile, banks began demanding higher credit scores and stricter documentation.
Right now, to obtain the best rates and terms for a home mortgage loan, a borrower needs a credit score of 750 or higher. You’ll probably be approved if your score is 700 or more, but you won’t get the best interest rate.
So aim for 750, but don’t count on it to be “good enough” in the future. According to a survey conducted by FICO, 46% of bank risk managers believe requirements will be tougher in the coming years. That might mean even higher credit scores will be required. So check your credit scores regularly, and take steps to keep raising them higher.
What about those new guidelines from Washington? They state that banks can extend FHA loans to consumers with scores as low as 580 with only 3 ½% down – and that those with scores between 500 and 580 can get in with 10% down?
The operative word is “can.” Banks are allowed to make those loans, but in reality, a FICO score under 600 almost guarantees that you’ll be turned down. Even those with scores between 600 and 700 will have a difficult time.
One reason why banks shy away from lower scores is that under the new Fannie Mae guidelines, banks can be held responsible for loans that quickly “go bad.”
That’s also the reason why any change in credit scores right up to the day of closing can cause a loan to be sent back to the underwriters. So if you’re shopping for a home, don’t do anything with credit except make your mortgage loan application and pay your bills on time.
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