Having coffee with two realtors yesterday and the question came up about credit scores needed for home buyers. Instead of me blurting out the answer, I ask them what they thought the minimum credit score that was needed. Their answers surprised me, one said 640 and the other said a 620. WOW it then hit me, I need to do a better job educating and updating all Realtors out there so they do not miss the opportunity to make their next sale!
Every lender has their own guidelines for credit and underwriting your file, these are called overlays. Often, it is not just the middle score, but also the quality of the accounts and pay history that are factors in determining a mortgage approval. Here at The Mortgage Network of Ohio Inc., we have over 22 lenders we look towards for a potential buyer, so we know that the scores and other important criteria is met as we go through the preapproval process. This insures a smooth closing for all!
As a rule for the general public it is very difficult to obtain any mortgage with a middle score of less than a 620. Some lenders use a 620 or even a 640 as the cut off. Most will not take the time to work with you to get your scores raised. Here at The Mortgage Network of Ohio Inc., we have lenders that will lend with scores as low as a 580. The very best rates are reserved for scores above a 740.
How does the credit score system work and how does one increase their scores?
The credit scoring concept is based on boiling down a borrower’s entire credit history into one objective number. To help borrowers understand where they might score when they apply for a mortgage, the most important factor, of course, is a borrower’s record of paying their debts. Primary emphasis is placed on the last two years of payment history on currently outstanding debts. Thus, one 30 day late payment on a credit card or car loan within the six months prior to a credit scoring date could reduce a total score much more than four late payments four years earlier. Combined with payment histories, collection accounts and public records are also factored into a borrower’s credit score. Medical bills that go to collection, bankruptcies and lawsuit judgments all drag down total scores. Borrowers who establish new credit after a bankruptcy and maintain an excellent credit history afterward for at least two years can often achieve acceptable credit scores. Credit scoring systems also look at the number of inquiries to a borrower’s credit report over the last six to twelve months. A large number of inquiries could indicate that a borrower has been making an effort to obtain too much new credit too quickly.
Another credit scoring factor is a borrower’s outstanding balances against available credit limits. A borrower with $5,995 borrowed on credit cards with $6,000 in credit limits will be severely penalized by all credit scoring systems even with a perfect payment history. The rationale for lenders is that a borrower at maximum credit limits has no room to handle any emergencies that may arise. The only problem with this theory is that a borrower may have cash reserves in a bank account to handle problems that arise but credit scoring does not take this into account. Thus, in the new credit scoring system, having several credit cards with low balances in relation total credit limits results in a more favorable rating than having one credit card with a high balance. This is true even if a borrower owes exactly the same amount of money. The last consideration of most credit scoring systems is how long open accounts have been open, the longer that a revolving account has been open; the better. The good news for borrowers with limited credit histories is that new alternative credit programs have arisen that permit borrowers to use utility bills and other accounts that do not show up on a credit report to prove their credit history.
Everyone desires someone working on their behalf to insure that they are getting the absolute best terms and conditions for their mortgage loan and it’s very likely we can improve your credit scores, which will save you big money. The first step would be to call me and I can walk you through the process of getting your credit scores to the next level and hopefully have the opportunity to earn your mortgage business.
Jeff Steinacker is president and owner of The Mortgage Network of Ohio Inc., doing business in Ohio Indiana and Kentucky. The office is located at 8945 Brookside Ave #201 West Chester Ohio 45069. Jeff can be reached at 513 346 4070 x10 or 888 393 8784 x10 or by cell at 513 607 6079. On the web @ www.themortgagenet.net