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Understanding Credit Scores

Credit scores affect Mortgage Rates:

Creditworthiness is a big part of what Mortgage Lenders review to evaluate your eligibility for a mortgage, and what mortgage interest rate is available to you. Each of the three major credit bureaus, Equifax, Experian and TransUnion, collect data from all of your lenders about your history of borrowing and paying back credit. All of this information is compiled in a credit report, which any lender can access when applying for a loan.

Borrowers with high FICO scores, top tier ranges between 760 and 850, can expect to be offered a lower interest rate and more loan program choices. Those with credit scores at 620 and below can be expected to pay significantly higher interest rates and offered fewer mortgage loan options.

Beyond Credit Scores

While your credit scores are very important, it is not the only thing that lenders review in considering your eligibility for a mortgage. Your FICO score is one of the factors, but not the only one. There are some “offsetting factors” that can balance a lower credit score, such as having a large sum of money available for a down payment, large cash reserves in bank accounts or an overall low debt-to-income ratio.

Review your credit reports

When reviewing your credit report you need to make sure that the score given to you is one that you’ve earned. At times there can be mistakes on your credit report that can translate in to you receiving a lower score.

If looking to refinance your existing mortgage, or buying a home, have a copy of your credit report sent to you at least 6 months in advance of applying for a mortgage loan. Review each of your reports (from Equifax, Experian and TransUnion) and look for any errors. Contact the lenders of the errors reported to straighten out the record. It can sometimes take several months for any changes to be reported on the credit bureaus reports. If you are currently in the middle of a mortgage application, your lenders can do a rapid rescoring of your credit and those errors can be removed within 72 hours.

Improve your score

You can improve your credit scores by paying down outstanding balances on your credit cards. You should start with those credit cards that are closest to the credit limits available to you. Even if you have a history of on time payments, if you are borrowing a large percentage of the credit available to you and your credit cards are almost maxed out, this will hurt your credit score. If you focus on the credit lines that have the highest interest rates, you can take the extra savings in interest and apply it to other debts to pay down.

Don’t close accounts

Closing credit accounts can inflict harm on your credit score. That is because if you’ve closed accounts, but not reduced your overall borrowing, you’ve increased your indebtedness compared to the amount of credit available to you. Lenders like to see that you have large amounts of credit available to you but have used very little of it

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