Qualifying for a Mortgage -- How Do You Score?

Qualifying for a home mortgage may seem like gazing into a crystal ball to many homebuyers. In reality, lenders use a straightforward process for determining whether or not a buyer qualifies for a home mortgage. Today, thanks to a method called “credit scoring,” the chances of qualifying for a mortgage have even been enhanced.

Credit scoring, long used in the consumer lending and credit card arenas, is now part of the process used by the lending community to evaluate applicants for mortgage loans. Based on the data available in the borrower’s credit report, the score indicates the risk a potential borrower represents to the lender. Items considered in credit scoring include past delinquencies, payment history, current level of indebtedness, length of credit history and type of credit used. A borrower with a high credit score may be “rewarded” with a mortgage at a lower rate or more favorable terms.

Industry experts are finding that credit scoring may actually be helping buyers obtain financing for their homes. Surveys by the federal government’s Fannie Mae program, for example, have found that income level doesn’t necessarily correlate to a high credit score. In many cases, they found that buyers with low to moderate incomes frequently have much higher credit scores than those with high incomes. Moreover, they’ve found that those with a high credit score but who can afford only a small down payment, are less likely to default than those with a low credit score who make a high down payment.

Credit scoring is just one piece of the mortgage approval process, however. Lenders also consider length of home ownership, length of employment, monthly income, ability to save, loan-to-value ratios and length of occupancy in current home. These items are generally included in “mortgage scoring,” a process that lenders use to determine the risk involved in issuing a mortgage.

The higher your FICO® scores, the less you pay to buy on credit – no matter whether you’re getting a home loan, cell phone, a car loan, or signing up for credit cards. 

A person with FICO scores of 760 or better will pay less per month for a mortgage than a person with FICO scores below 620. You can see that it pays – literally – to improve your FICO scores.

Now that you know what lenders are looking for in their mortgage loan applications, are there ways you can increase your “score”? You bet! Avoid making late payments on credit accounts. Try to keep your credit purchases low and, whenever possible, pay off the balance each month. If you have items on your credit report that could reflect negatively on your ability to secure a mortgage, be prepared to explain each matter in writing. Also consider putting off any major purchases until after you’ve moved into your new home.

We can help you determine how much home you can afford or learn about financing options. We can also work with you to obtain pre-approval status for a mortgage before you begin your home search. This not only prevents “surprises,” but it will give you a bargaining edge when a seller sees that you have already secured financing. For more tips go to Make a Game Plan.