Your credit score, known as FICO, is derived from calculations done by each of the three credit bureaus, Equifax, TransUnion, and Experian. Because each credit bureau has slightly different information, and because each bureau uses its own formula to calculate your FICO, your credit score may vary from bureau to bureau.
Credit scores are expressed in numbers between 300 and 850. The highest numbers are the best scores and denote what banks consider to be the most reliable borrowers. While the exact formula for coming up with a FICO is not publicized, experts believe that the most heavily weighted factors are payment history (including delinquent and defaulted loans), amount of money currently owed, length of credit history, types of credit, and whether or not you’ve recently taken out new credit.
Get the Best Mortgage Rates
If you want to be eligible for the best mortgage rates, you will need to maintain a credit score of 760 to 850. Not only will this excellent score motivate the lender to lower your rates to get you as a customer, you will also be offered more choices about which mortgages are available to you.
As an example of how much difference a good credit scores can make, consider this: if your score is 500, you will pay nearly twice the mortgage rate of someone whose score is in the 800s. Over years of repayment, this can put a considerable dent in your wallet.
Subprime Mortgage Loans
If your score drops to 620 or less, about the only type of mortgage loans for which you will qualify are called subprime loans. These loans not only carry high interest rates, but you may be blocked from getting certain kinds of loans. A lender may also limit the amount you are able to borrow by insisting on a large down payment.
Hard Money Loans
The lowest score you can have and still be considered for a subprime loan is 500 to 520. If your score falls below this mark, traditional lenders won’t touch you no matter how much interest you’re willing to pay. If you are in this position, you may want to apply for a hard money loan, a short-term asset-based loan with strict foreclosure terms in the event of nonpayment.
It’s amazing how one little number can affect your future financial life. Make sure to check your scores from the different credit bureaus, this one number will play a key role in dictating the terms of your mortgage.