How Bad Credit Can Affect Your Mortgage

Credit scores are a prime topic of discussion for any would-be homeowner.  The point system that is the baseline for credit analysis is your FICO score – a term taken from the name of the company that developed the formula: Fair Isaac and Company.  Your credit can range from 350 to 850; for most of us, the range is between the mid 500s and 700 plus.  In order to qualify as an “A” or “prime” candidate, your credit score should be above 680.   A ranking in this range qualifies you for the best interest rates available from the lender and, perhaps, for lower loan origination costs.

Your credit rating is one component of a loan officer’s analysis.  The lender will also take a look at your monthly budget, and specifically how much of it is dedicated to debt service.   At one time, the maximum acceptable debt to income ratio was thirty six percent.  That is no longer the case – if it were, very few of us would be able to afford mortgage payments.  Debt-to-income is, however, one of the criteria that will determine your relative acceptability as a borrower.  If your ratio is high and the lender opts to give you a loan anyway, the loan will be more costly than if you were carrying less debt.

None of this means that you can’t negotiate with a lender over mortgage terms and loan origination costs.   It is important to understand, however, that standards differ from lender to lender, and some credit-oriented statistics are more important to one institution than to another.   That’s why it’s important to shop for a loan regardless of your FICO score, your indebtedness, and even a history of credit problems. 

Many lenders look more closely at the timeliness of your monthly payments on debt than they do at your total indebtedness.  Mortgage brokers have long grown accustomed to doing business with people that have had credit problems, even bankruptcies, and who are classified as credit risks.   After all, there are between thirty five and fifty million of us.  The critical issue will be your ability to make that mortgage payment on time.

The difference between prime and subprime is difficult to quantify; there are varying levels of subprime status and varying standards among lenders.  Generally however,    if you are a subprime borrower (that is, less than an “A” grade credit rating) you can expect a loan of at least two points higher in interest than the same loan would cost a prime borrower.  The higher a risk you are deemed to be, the higher your interest rate will be.

You may also be asked to pay a higher down payment and higher loan origination costs than the prime borrower, although in today’s market there are a multitude of low down payment mortgages available in the subprime market.  Keep in mind also that you may be in a position in a few years to refinance this loan at a better rate because your credit rating may have improved.  Cleaning up bad credit is not a drawn out process if you are diligent about it.

Source: Mortgage Lenders Plus.com

Service and Data Privacy provided by SecureRights This is FREE! No Credit Check and No Obligation. Loan Type Refinance Purchase Home Debt Consolidation Home Equity Property Location Select One Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Iowa Idaho Illinois Indiana Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Missouri Mississippi Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Property Type Single Family Multi Family Town House Condominium   (No mobile or manufactured homes)   SecureRights collects and transfers your information to complete your request. By submitting your request you agree to be contacted in accordance with SecureRights Privacy Policy. View SecureRights Licenses.