If you are refinancing your mortgage your credit score will largely influence the interest rate and terms you receive for your new loan. Understanding your credit is the first step in qualifying for a better mortgage. Here is what you need to know about your credit score.
The FICO credit score that many mortgage lenders use to gauge your credit worthiness is generated by a company called Fair Isaac Corporation. This company evaluates the contents of your credit file and based on a proprietary scoring method, generates your credit score. FICO credit scores range from 350 to 850. The higher your FICO score the better; having a high credit score will allow you to qualify for better loan offers.
Your credit score tells mortgage lenders at a glance, how much of a risk you are. If your credit score is too low many lenders will deny your mortgage application. If your credit score is poor, but not too low, you may still qualify for a mortgage; however, the lender will charge you a higher interest rate and fees for the loan.
Mortgages lenders break credit scores down into varying degrees of good and bad. Lenders generally consider having a FICO score of 720 to 850 to be excellent credit. A credit score of 675 to 720 is a fair to good credit rating. If your credit score is 620 to 675, mortgage lenders consider you to have average credit. Below 620 you will start paying more for your mortgage. If your credit score is between 500 and 560, mortgage lenders start considering you a high risk borrower.
There are steps you can take to improve your credit score before applying for a mortgage loan. The first step is to make all of your monthly payments on time; thirty five percent of your credit score is based on your history of late payments. It is important to have a minimum of six months worth of on-time repayment history in your credit history before applying for a mortgage. Other steps you can take to improve your credit score include paying down the balances on your credit cards and closing accounts you do not need. To learn more about qualifying for a better loan when refinancing your mortgage, register for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
