Credit Report | Credit Score

Credit Score is a prime topic of discussion for any would-be homeowner. The point system that is the baseline for credit analysis on your Credit Report is your FICO Score – a term taken from the name of the company that developed the formula: Fair Isaac and Company. Your credit report will show a range from 350 to 850; for most of us, the range is between the mid 500s and 700 plus. In order to qualify as an “A” or “prime” candidate, your credit score should be above 680. A ranking in this range qualifies you for the best interest rates available from the lender and, perhaps, for lower loan origination costs.

Your credit score is one component of a loan officer’s analysis. The lender will also take a look at your monthly budget, and specifically how much of it is dedicated to debt service. At one time, the maximum acceptable debt to income ratio was thirty six percent. That is no longer the case – if it were, very few of us would be able to afford mortgage payments. Debt-to-income is, however, one of the criteria that will determine your relative acceptability as a borrower. If your ratio is high and the lender opts to give you a loan anyway, the loan will be more costly than if you were carrying less debt.

None of this means that you can’t negotiate with a lender over mortgage terms and loan origination costs. It is important to understand, however, that standards differ from lender to lender, and some credit-oriented statistics are more important to one institution than to another. That’s why it’s important to shop for a loan regardless of your FICO Score,your indebtedness, and even a history of bad credit problems.

Many lenders look more closely at the timeliness of your monthly payments on debt than they do at your total indebtedness. Mortgage brokers have long grown accustomed to doing business with people that have had credit problems, even bankruptcies, and who are classified as credit risks. After all, there are between thirty five and fifty million of us. The critical issue will be your ability to make that mortgage payment on time.

The difference between prime and subprime is difficult to quantify; there are varying levels of subprime status and varying standards among lenders. Generally however, if you are a subprime borrower (that is, less than an “A” grade credit rating) you can expect a loan of at least two points higher in interest than the same loan would cost a prime borrower. The higher a risk you are deemed to be, the higher your interest rate will be.

Depending on your credit score from your credit report, you may also be asked to pay a higher down payment and higher loan origination costs than the prime borrower, although in today’s market there are a multitude of low down payment mortgages available in the subprime market. Keep in mind also that you may be in a position in a few years to refinance this loan at a better rate because your credit rating may have improved. Cleaning up a bad credit report is not a drawn out process if you are diligent about it.