Determining Credit Score and Risk [Video]

Your credit score is a huge factor when it comes to qualifying for a home loan. For example:

• Scores under 600 run the risk of not being approved
• Scores between 600-640 may only be approved for an FHA loan
• Scores of 680 or above will be accepted at most financial institutions

As you can see, if your score is too low, it can prohibit you from getting approved. The higher your score, the more likely you’ll qualify for the home loan of your dreams!

Here’s the thing that you might not realize though. Unlike going into, say, Walmart, where as long as you have $10 you can buy anything in the store that’s $10, in mortgage lending – and in most lending – your credit score is going to determine your risk. And risk is going to be used against you in the form of interest rate.

Adjustments to Interest Rate

The interest rate on your loan is going to depend on your credit score. If you have a low credit score, you’re going to have a higher interest rate. Here’s the thing you might not have been told though. In today’s lending market, if you’re under a 740 credit score – even though you might be getting approved because you’re at a 721 – chances are you’re going to get an adjustment to your interest rate.

Generally speaking, most home loans are going to be sold to the secondary market, and everybody will be looking for a 740 credit score or better. With a 740 credit score, there are no adjustments to interest rate based on credit reporting or credit score. But go one digit down to a 739, and you’re probably losing 1/8 to 1/4 of a point, simply because you’re one point away from the Fannie Mae adjustments.

Think about this: your home is likely the largest thing you’re ever going to buy. As excited as you are to finally get told, “Yes, I can approve you,” wouldn’t it make sense to wait 3 or 4 months and work on getting your credit up another 20 or 40 points to the 740 mark? Then you can walk back in and get a quarter or half a point better interest rate, simply because the risk is now lower and the banker doesn’t have to add those Fannie Mae adjustments.

It’s really important that you understand that, even though you might be qualified with a 640 or a 660 credit score, chances are you’ll get a hit to your interest rate simply because you’re not at that 740 mark. This doesn’t mean that you can’t apply for a loan until you reach a 740, but you will be losing some money by making that financial decision.

Working with Heartland

There are so many things and so many ways we can help people get a 20 point bump, or a 15 point bump, or a 30 point bump. Don’t just take any interest rate on the home of your dreams. Take an interest rate that makes sense so that you save money long term.

Sign up for your free credit review to get started with Heartland Credit Restoration today.