Credit checks are a necessary part of applying for any loan, but they are especially important during two stages of the loan process: on the day you apply for a mortgage and shortly before closing on the loan. The first credit check is to ensure that you pay your bills on time and have sufficient income to purchase the property. The last credit check before closing is the lender’s last assurance that you are, indeed, creditworthy.
Knowing what lenders look for on your credit report and in your FICO® score is important information and can help you prepare to get the best mortgage possible.
Mortgage lenders take your credit score very seriously. Even though studies show that applicants with high FICO® (Fair Isaac Corporation) scores are more likely to strategically default on a mortgage loan (walk away from it), applicants with low scores are still considered a greater risk by lenders.
Generally, the better your score, the more options you have. You’ll be able to buy with a lower down payment, access a wider variety of loan types, and pay fewer points for a lower mortgage interest rate.
Good Score? Lower Mortgage Interest Rate
How much lower will your interest rates be if you have a good credit score? This will vary from individual to individual.
Keep in mind that the FICO® scoring range runs from 300 to 850. Let’s say you’re applying for a 30-year mortgage and your FICO® score is 760, which is a very good score. Your interest rate may be among the lowest on the market.
Now, let’s assume your FICO® score is quite a bit lower: only 620. Suddenly your interest rate is dramatically higher. If your score falls between 500 and 520, you will have much higher interest rates and you’ll find fewer lenders willing to work with you.
Borrowers with scores between 300 and 500 are generally not considered creditworthy. If you’re interested in learning more about how your score impacts the interest rate on your new mortgage loan, see the chart at MyFico.com.
My Score was Fine. Why Wasn’t I Approved?
Even with a sterling FICO® score, you may still be turned down for a mortgage loan. If you are unemployed or have been within the past two years, you may not be approved for a loan. If you don’t make enough money to cover the monthly payments, you may be denied a loan. There are any number of reasons a lender may not want to work with you, even with a high FICO® score.
Credit Checks and Life
Your financial history will not only affect your chances of buying a house, but may impact your ability to receive financing for a car, a vacation or for home renovations.
Insurance rates may also be affected by your rating, as poor ratings usually mean higher premiums. Many colleges will consider your financial history before they approve student assistance programs. Even employment may be affected, as many employers require a credit check as a character reference before offering a position.