Explanation Of A Credit Score And Its Effects On Mortgage Rates
While many people have heard of a credit score and know it is very important when it comes to obtaining any type of credit or loan account, not everyone understands exactly what a credit score is and how it impacts the ability to get a decent mortgage rate. By knowing what a credit score is, how it is calculated, and how it makes a difference to mortgage lenders, potential homebuyers can make sure they are in the best position possible to get the best rates possible when the time comes to finance or refinance a home.
A credit score is simply a means to express an individual’s credit worthiness in terms of number. In a sense, this number is determined based on how responsible the individual has been with finances in the past. The process is not unlike scoring a test taken in high school test. Right actions cause the score to increase; while a poor choice in terms of the use of finances leads to a lower score. As with a school exam, the goal is to make sure your credit score is based on as many right choices as possible, while making sure there are as few wrong choices on your credit report as possible.
The good news is that a low credit score can be improved over time. By taking steps to correct poor money management habits and begin to build savings, keep current debts up to date, and gradually pay down your overall indebtedness, your credit score will incrementally improve over the years. However, keep in mind this is not an overnight event. Bad reports tend to linger on credit reports for years, and have a direct impact on your credit score for as long as they appear. Fortunately, adding positive items to your report helps to offset the older bad ones over time, as it becomes evident you are becoming more fiscally responsible.
Never underestimate the effect that your credit score has when it comes to making a major purchase. For example, making sure your credit score is as good as possible is very important when you begin looking for a mortgage. Not only will a lower score prevent you from obtaining the best rates currently offered, it may actually prevent you from obtaining a mortgage at all.
Most mortgage lenders look very closely at your credit score and the reasons for that current score. The reason for this is very simple. When lenders choose to grant a mortgage to a new customer, they are in effect trusting you to repay the amount you borrow, along with interest, according to the terms contained in the mortgage contract. In other words, the lender is assuming a degree of risk in order to do business with you.
In exchange for helping you secure the home of your dreams, they want to be reasonably assured that they will get their money back, with interest. When your credit score is not as good as the lender would like, he or she will dig deeper into your credit history to find out what factors led to the current calculation of your credit worthiness. If the lender is uncomfortable with the results of that investigation, your chances of getting a favorable rate of interest goes down considerably.
People with a high credit score simply get mortgage offers that feature a lower rate of interest. Many lending institutions have a simple scale that allows them to determine quickly what rate of interest should be extended to any applicant with a given credit score. Those with excellent credit will be offered the lowest rates available from the lender.
People who have experienced some financial trouble in the past but have rebuilt their credit score up to a reasonable level will still get a good rate, but not one of the best ones on the market. People with a lower credit score are considered to be in a high-risk category, and will only be offered mortgage rates that are less than attractive to many buyers.
For those with poor credit scores, the chances of obtaining a mortgage at any rate are extremely low. Even lenders who specialize in high-risk mortgages will only go so far in the amount of risk they are willing to assume in order to secure a customer. If your current credit score and the supporting items on your credit report indicate there is no real reason to think you will repay the loan according to terms, you will probably be rejected by even the most liberal of mortgage companies.
The bottom line is that your credit score plays a major role when it comes to securing a mortgage of any kind, as well as being key to determining how low an interest rate lenders will offer. Before applying for any mortgage, know what your credit score is and why it is at the current level. If possible, take steps to raise your credit score before you make that first application. The effort could pay off in a big way.
