Understanding Your Credit Rating

Before you think about buying real estate

      The most important factor in getting a favorable interest rate on a mortgage on a Sarasota real estate property is your "credit history."  Let's try to help you understand your credit rating and the mortgage terms you will hear from lenders based upon your credit rating or "credit score". You need to know what your credit rating is before thinking of buying real estate

      When you apply for a mortgage from a lender or broker, the most important factor is your credit.  Your ability to get a home mortgage is determined almost entirely by your credit.  There are other factors but your credit rating is the single most critical factor that determines whether you'll get a mortgage loan at all and at what interest rate you will pay to buy a piece of property.  The better your credit rating, the lower your mortgage interest rate will be.

Before You Start Looking for a Home

      Before you start looking for a home, take the time to order your credit report from all 3 major credit reporting agencies.  The three major credit reporting agencies are:

A General Guide to Credit Ratings

      Your "credit rating score" is expressed as a "FICO (Fair Isaac Credit Organization) Score", a standardized way of expressing credit worthiness.  It's a measure of the risk a lender takes in providing you a home loan.

      To develop their specific credit scoring model, each mortgage provider selects a random sample of its past and current customers and analyzes it statistically to identify those characteristics that relate to creditworthiness.  Each factor is assigned a weight based on how strong a predictor it is of who will likely be a good credit risk.  Creditors may use their own credit scoring model, different scoring models for different types of credit, or a generic model.

      Under the Equal Credit Opportunity Act, a credit scoring system may not use certain characteristics like race, sex, marital status, national origin, or religion as factors.  However, home mortgage providers, like all creditors are allowed to use age in a properly designed scoring system.  But any scoring system that includes age must give equal treatment to elderly applicants.

      Factors that can damage your FICO credit score include late payments, absence of credit references, and unfavorable credit card use.

      According to www.credit-score-online.com, your FICO credit score is made up of five major components:

     You can learn more about how your FICO score is computed at www.credit-score-online.com.

Some Typical Credit Score Guidelines

FICO Scores 650 and Above

      In general, a FICO score of 650 or above indicates very good credit.  People with scores above 650 will find the loan process to buy a real estate property quick and easy, at or close to the lowest rate available and be eligible for a down payment as low as 5% - 10%.

FICO Scores between 620 to 650

      FICO scores between 620 and 650 indicate basically good credit. (Average FICO scores fall into this range.) People with scores in this range have a good chance at a mortgage at a good rate, but may must provide the lender with extra documentation and explanations.

FICO Scores between 550 and 620

      A FICO score below 620 will likely prevent you from getting the best interest rate since you're considered a substantial credit risk.   This alone doesn't mean that a mortgage can't be found if all other considerations are favorable.  People with FICO scores like this will be required to make higher down payments and pay a higher interest rate.  For some in this situation, it can still be a good idea to buy that home for sale. Make your payments on time, clean up your other credit exposures and then, in a couple years, ask again to refinance your mortgage to a more attractive interest rate.

FICO Scores below 550

      This scoring represent an overall poor credit history.   At this credit rating, many home loan lenders will refuse to give you a mortgage under any circumstances.  If you do get a mortgage, part of the loan will be used to pay off other debts before any is applied to your Sarasota real estate purchase, the interest rate will be quite high and you may be required to make a much higher than usual down payment of 30% or more).  If your FICO score is this low, you probably need to consider "cleaning up your credit" before trying buy a home.

     These are "general" guidelines"  Some mortgage providers assign different grades or use different grade definitions based upon their own methods of evaluating credit worthiness.

      Here's the bottom line.  If you want to buy real estate, start today to think about everything you do and every bill you pay on time or let slide, in terms of its effect on your credit rating.

    If reviewing these articles has tickled your interest about what other "add-on" services and facilities we offer to expand your real estate website at a very affordable cost, give us a call at (585) 385-6775 and let's chat about your interests.