Mortgage loans and your credit score: What's the magic number?

[Sep 29, 2010.]

 

You want to buy a home, and you've heard that you'll need pristine credit to qualify. Although it's true that mortgage lenders have tightened credit requirements, it's still possible to qualify for a home mortgage loan or refinance mortgage at favorable rates if your credit score is 720 or above. In the current climate of tighter credit requirements, borrowers with credit scores below 620 are finding it difficult to qualify for mortgage loans. Although FHA provides mortgage loans to borrowers with credit scores over 500, FHA lenders are allowed to base loan approval on their own underwriting. Known as "investor overlay," this practice may impact credit challenged borrowers' access to FHA home loans. If you're planning to buy or refinance a home, taking steps to raise your credit score can help with improving your chances for mortgage loan approval.

• Check your credit reports: You are entitled to one free copy of your credit reports from each of the three major credit bureaus annually. You can order your free credit reports at annual credit report.com, but you'll have to pay for your credit scores. Evaluate your credit reports carefully, as erroneous information can negatively impact your credit scores.
• Pay off consumer debt: Lowering the amount of debt you owe can improve your credit scores and can also increase your chances of getting a mortgage at favorable rates. Concentrate on paying of your highest APR debts first.
• Establish and contribute to savings: Having savings other than retirement accounts suggests that you're financially responsible and have emergency savings. Once you buy a home, there's no more calling the landlord to fix a leaky roof or plumbing problems.
• Save toward your down payment: The more you can put down toward buying a home, the better your mortgage quotes are likely to be. Mortgage rates are based on credit worthiness; the less mortgage lenders have to loan, the better the credit risk.
• Establish income: Steady employment or owning a business showing sufficient profit for the past two years helps with qualifying for a loan. If you own your own business, be prepared to provide profit and loss statements in addition to income tax returns.

Planning ahead for buying a home and improving your credit can help with saving money on your mortgage loan. Don't fall for schemes promising to erase bad credit or charging a fee up front for "mortgage help." Contact a HUD approved housing counselor for advice about buying your first home.

 

About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.