A Look at Credit Scores in the Mortgage Industry

I’ve had people recently ask me about qualifying for or preparing to buy a home. One of the big topics that have come up is credit. We all know that your credit score is really important. I wanted to take a moment to show you how we look at credit scores in the mortgage industry, as well as some tips on how you can improve your credit score and what it takes to qualify for a mortgage.

Interest Rate Impacts

When you prepare to purchase a home or refinance, there are some risk factors that have an impact on the interest rate such as:

• Loan-Term
• Property Type
• Debt-To-Income Ratios — how much money you make monthly compared to how much your debts are each month.
• Loan-To-Value Ratios — how much you need a loan for compared to how much the house is worth.
• And the biggest consideration is your Credit Score, which will have a huge impact on what your interest rate is and how much your mortgage insurance will be if needed.

Credit Breakdown

• 35% of your credit score is made up of credit payment history – paying your payments on time.
• 30% is how much you owe in total on the credit accounts.
• 10% is comprised of new credit. If you’re planning for a mortgage I recommend not opening up any new credit 6 months prior to your loan so that it doesn’t negatively impact your credit score.
• 15% comprises the length of your credit history – what period of time the accounts have been open.
• 10% is having a good credit mix. So, having multiple credit cards, student loans, car notes, bank loans, etc.

Loan Types

When you look at qualifying there’s really two main loans. There are many loan types out there, but the two main loan types are FHA and Conventional. At Options Financial, the minimum credit score you’ll need to qualify for FHA is 600. Our minimum for Conventional is 620. And these can vary during different times. When trying to qualify, get your credit score to at least 600 and look at ways for improving from there.

Credit Tips

The biggest tip I can offer for improving credit score is that for each individual credit item you have, keep your balance at 30% or lower of the total credit limit. For instance, if you have a $500 max credit limit on a card and your balance is $400, that’s about 80% of the total credit and shows that you’re stressed on that credit line, which will have a negative impact. So, make sure that all of your individual credit accounts are at 80% or less, which will have an immediate impact on boosting your credit score and help you qualify quicker.

Craig Gray
Loan Officer NMLS 1380586
(971) 717-8067
craig.gray@optionsrm.com
OptionsRM.com/Craig.Gray
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