Credit Scores and the Loan Process

Laura Duggan talks with lender, Ben Morton about the importance that credit scores play in the loan process. Ben describes how credit scores are calculated and reported by the three credit bureaus, Equifax, Transunion and Experian and how your credit rating will affect your interest rate.

Credit scores play an important role in the loan process and your ability to obtain the best rate on a loan. The lender will run a mortgage credit report after your initial interview. A mortgage credit report differs from other credit reports in that it is more detailed and thorough. Credit ratings can differ on these reports and can come in lower than ratings you’ve gotten from different creditors.

The best credit scores you can get are between 740 and 800 points. The very lowest interest rates are reserved for buyers with these ratings. Interest rates adjust incrementally upward when your credit score falls every 20 points. For example: A buyer with a credit score of 740, may be able to get an interest rate of 5%. A buyer with a credit score of 720 will get a slightly higher rate on the same loan on the same day, perhaps 5.25%.

Late payments are the largest culprits in reduced credit ratings. If you are late with a credit card payment, car payments or mortgage payments, these dings will affect your score. Late mortgage payments are the worst and may prevent you from being able to get a loan based on an unacceptable credit score. When planning to purchase a home, it is important to pay your bills on time. Other things that affect your score are the number of inquiries made on your credit, the number of creditors you have and the total amount of debt you are carrying.

If you’re planning to buy a home, monitor your credit with each of the credit bureaus each year. By law, these bureaus have to give you one free report upon request. Be careful of scams from companies that offer to give you free credit reports then enroll you in an expensive service. Better yet, contact your mortgage lender and get the credit report in anticipation of your home purchase.