When purchasing a new home or refinancing your existing mortgage your credit score is hugely going to affect what mortgage you can get. Banks and other lenders use your credit score to see whether you are eligible for a mortgage and to establish if you could meet the repayments. This determines how high or low your mortgage rate will be, or if your even eligible.
Which Credit Score do Mortgage Lenders Use?
Firstly, there is no point focusing on a credit score that mortgage lenders wont look at. Mortgage lenders and banks look at FICO credit scores, nearly every mortgage lender will use FICO credit scores and 9 out of 10 standard lenders use FICO credit scores.
There are three scores in particular that mortgage lenders will look at, this includes one from Experian, one from TransUnion and one from Equifax as these are the three main credit bureaus.
Find Out Your Credit Score Before You Apply For a Mortgage
Before you apply for a mortgage, it is always recommended that you view your credit score way before you actually go out and get a mortgage. You should check your credit score at least 3 months before in case need to make changes to your score as this can take several months to take place.
For example, if there was a legitimate issue that is causing your credit score to be lower than expected then this can take several months to be cleared up, and it is always a risk leaving something to chance.
What Influences Your Score?
There are many things that can change your credit score. The biggest changes are payment history and your current debt load. These two factors alone account for 60% of your score. Other factors are length of credit history, any new credit and the mix of debts (different purposes for loans).
Tri-Merge Credit Score
Also, it is always advised that you should use a service that offers a tri-merge credit score. This is a credit score from all three bureaus. Each bureau reports information about your credit score differently, so just knowing one credit score will not be much help to you or your mortgage lender.
The reason mortgage lenders do this is so they can triple-check your credit before handing you a large sum of money. They use the middle score of all three, so it is important that al three scores are at there best.
For example, if you have credit scores of 670, 690 and 720, your mortgage lender would use the middle credit score (690), which is just below the average credit score. If you only have two credit scores then your mortgage lender will use the lower of the two, and if you only have one credit score you are unlikely to be accepted due to lack of credit history.
The Lower Your Credit Score, The Higher Your Mortgage Rate
As you probably know, the lower your credit score the higher your mortgage rate. This is due to risk, the lower your credit score the higher the chance that you will default on your mortgage.
So if you have a very low credit score the chances are you will not get approved for a mortgage. It is too risky for lenders.
But if you are approved with a credit score below average, you can expect to be paying a higher interest rate and higher monthly repayments. With banks and lenders becoming even more strict with credit scores, it is important yours are in tip-top shape.
For example, most mortgage lenders have a minimum credit score of 500. In the past there has never been a minimum to apply. 500 is an bad credit score to have, however, many banks require a higher than minimum credit score, such as 600. Meaning the minimum credit score is quite deceiving.
Below 620 is Sub-prime
If your credit score is below 620 it is usually considered sub-prime (below average). This makes getting a mortgage loan a difficult process. If your accepted you will be receiving a much higher mortgage rate.
In general, a credit score over 720 will usually avoid any negative pricing adjustments, but for the lowest rates a credit score of 760 or above is recommended.
If your one of the lucky ones with an excellent credit score, you can usually reduce the mortgage rate, so having a good credit score does come with it’s rewards.
Your credit scores do not just affect your acceptability for mortgage loans, it also affects your maximum loan-to-value ratio and what you can do with your mortgage loan, such as cash-out finance.
So in summary, your credit scores are one of the few financial things that you have complete control over. Unlike things like, assets, income and jobs that can be changed due to external forces. So having the best credit scores will ensure you get the best mortgage loan deal.
Other Dependants When Applying For a Mortgage Loan
Even with an excellent credit score, it doesn’t necessarily mean that you will be accepted for a mortgage loan. If you have an excellent credit score but low income you will find it difficult to apply for a mortgage. Unless the mortgage company can see that you have a consistent income that is enough to pay back the mortgage loan then you are unlikely to get the loan.
AFP Mortgage Advisers
AFP Partnership was set up in 1997 by a group of professional Independent Mortgage Advisers. They have over 30 years experience and are all fully qualified. Our head office is in Maidenhead and we are based in Shrewsbury, Shropshire, but we have clients nationwide.
Gary Harper (Bsc, Hons, Cemap) is a partner of AFP Shrewsbury and he recently won the Client Servicing Award. Gary lives in Shrewsbury and he is happy to visit clients anywhere in Shropshire.
Taking out a mortgage is one of the biggest financial commitments that you will make. So why do it alone? AFP Partnership are professional mortgage advisers. If you’re looking for mortgage advice or would like to meet a mortgage adviser please call us on 01743 364 377.