Mortgage lenders use your credit score to determine how much of a risk you are for lending. Your credit score is calculated by the Fair Isaac Corporation, also called FICO, and is based on the contents of your credit reports. Your FICO score is based on a numeric scale; if your score is less than 620 you are considered having bad credit. If your score is between 620 and 650 you have good credit, and finally, if your credit score is above 720 you have excellent credit. Credit scores are not the only factor mortgage lenders consider when evaluating your application; lenders also look at your income, assets, and debts before approving your mortgage application.
If you have bad credit and your score is less than 500, you can still be approved for a mortgage. Credit scores below 500 may be limited to “sub-prime” mortgage lenders; these are lenders that specialize in writing bad credit loans. These bad credit mortgages come with a much higher price tag: lender fees, interest rates, and points are all much higher on these loans. A mortgage broker may be able to help secure financing for you if you have a low credit score.
It is important to review your credit reports before applying for a mortgage. Errors have a disastrous effect on your FICO score and you need to dispute them and have the errors removed before applying for a mortgage. Late payments also damage your credit score; it is important to have at least six months worth of on time payments before shopping for a mortgage loan.
Not all mortgage lenders use the FICO score to approve mortgage applications. Alternatives to FICO include Scorex. It is not uncommon for mortgage offers to vary widely from one lender to the next based on different credit scoring systems.
You can learn more about how your credit affects your mortgage by registering for our free Underground Mortgage Refinancing Videos.