How Your FICO Score Affects Mortgage Approval and Rates
Getting approved for a mortgage is no small feat, especially if you have had financial difficulties in the past that may have marred your credit record. That is why it is vital that potential homebuyers get their credit in good order before trying for a mortgage. It is equally as important that would-be homeowners understand how their consumer credit score affects their probability of being approved for a mortgage, and, if approved, how their credit score can affect the rate that the mortgage is written at. Let’s take a closer look at your credit score and what you need to know about your credit report before trying for a mortgage loan. (Interestingly, what you thought you knew about credit scoring may have changed somewhat with new credit formulas that are in use today).
Credit Balance to Credit Limit Ratio
The ratio of your credit balance (what you owe) as it relates to the credit that is available to you has a huge influence on the scoring formula that is used by lenders when they approve or deny your mortgage. Having a high available credit limit and lower balance may cause your credit score to go up. In general, a ratio of less than thirty percent is ideal to appearing more creditworthy in the eyes of the lender.
Type and Number of Accounts
Formerly, having a lot of open accounts would be seen as a drawback to having good credit. Under the newer credit formula, having more active and open accounts can sometimes add points to your score, assuming the accounts are current and not brand new.
Negative Items
The new credit scoring model is a bit more forgiving to potential borrowers that have few negative issues on their credit records. Under the new model, the severity and frequency of negative items will be factored in, which will make small, isolated problems have less of an impact on the overall credit score. Recurring late payments will still pack a powerful punch, however.
Small Collection Accounts
Under the old scoring model, even a collection account for fifty bucks could result in someone not being approved for a mortgage. An original collections amount of less than $100 should now be disregarded under the new model. This is a plus for those borrowers who might have fairly insignificant collection accounts from things like library fines, parking tickets, or small medical bills, among others.
These small changes could make a big difference for a lot of borrowers who are looking to become homeowners.
