The credit score is generally the prime determiner in whether a prospective house purchaser is able to qualify for a mortgage. In the United States, most houses are purchased through the acquisition of a mortgage. Most home purchasers in the United States today do not have the funds to purchase a home without a mortgage.
This was not always the case. In much of the history of the United States, purchasers of houses would pay for such houses with cash or actual funds. The introduction of mortgages, and the governmental subsidization of the mortgage industry, has according to numerous analysts, caused the inflation of the price of houses. Such price inflation has created a condition whereby most prospective home buyers in the United States must procure a mortgage in order to purchase a house.
A similar dynamic occurred in higher education in the United States. Before the introduction of student loans, the price of a college or university education was relatively inexpensive. The colleges and universities were forced to control their costs due to the limited resources of its prospective students. Many college students were able to raise the funds to pay tuition simply by working in the summer.
For example, if the average college student, through work, collected savings, and family support, was able to pay $3,000 per year in tuition, and outside sources of funding did not exist, the colleges and universities would restrain their costs and expenses to accommodate the funds available to such students. However, if the average student, in addition to the $3,000 per year in available funding, was given a $10,000 in addition funds through student loans, the college or university will likely expand its costs in recognition of the additional monies available.
This is exactly what happened. Tuition that was once $3,000 per year is now $13,000 per year, or more. This is the same dynamic that has occurred in home pricing. This is the same dynamic that has occurred in various segments of our economy, including the medical industry. In each of these industries, the cost of the service or product has generally greatly exceeded the cost of inflation.
The reality is, however, that most persons seeking to buy a house in the United States must seek to obtain a mortgage. Otherwise, such purchase is largely unattainable.
A mortgage is a loan specially used to finance the purchase of a house. Factors to consider when applying for a mortgage include available down payment, one’s credit score and how that affects interest rates, and consequently, monthly payment obligations and the total cost of the mortgage, the burden of taxes associated with ownership of a house or home, and the cost of insurance.
A conventional mortgage for a home insured by Fannie Mae or Freddie Mac in the year 2018 will require a minimum credit score of 620. The lowest credit score to obtain a FHA or Federal Housing Authority loan, is 580. FHA will insure an applicant with a 500 credit score but the applicant must tender at least 10% of the purchase price as a down payment. If the applicant has a least a 580 credit score, the applicant will need as little as 3.5% down payment. It appears, however, that an applicant will a higher credit score (580+) and a smaller down payment is more likely to secure the mortgage than an applicant with a low credit score (500) and larger down payment.
Currently, a VA loan requires a 620 credit score, although some lenders may permit 580. A USDA loan requires at least a 640 credit score.
These are minimum scores. Such minimum scores do not guarantee that an applicant will secure a mortgage with such credit scores. In fact, such credit scores are generally considered to be in the range of fair or bad credit.
Generally, a credit score of 750 and above is considered excellent. A credit score of 700-749 is considered good, a credit score of 650-699 is considered fair, 550-649 is poor, and 550 and below is bad.
All credit scoring has a range of 350-850. A credit score of 740-750+ generally garners the best interest rates available to lenders. A credit score of 680-739 is the score held by most homebuyers. A credit score of 620-679 may raise one’s interest rate about 0.5% above the rate paid by those with the higher credit ratings. At 580-619, the interest rate may climb an additional 1% and 579 and lower, an additional 2%.
These are figures reflecting home lending in 2018. Such guidelines are subject to change. The government will tighten and loosen lending regulations and lending criteria based upon various factors, most prominently that state of the greater economy, and the housing industry.
The housing crash beginning at the end of 2005 and continuing at least through 2007-2008 was partly caused by the loosening of lending standards whereby persons with poor credit were readily provided with subprime loans. Many of these loans carried adjustable interest rates, balloon mortgages, and other devices. Many loans did not require any form of income verification.
Many lenders and mortgage brokers represented to the buyers that such devices were unimportant because the rapidly accelerating home prices would ensure that the buyer could refinance the home in a few years, escaping the adjustable rate mortgage, and other subprime devices. When the market crashed many buyers were left with homes that had a fair market value which was less than 50% of the mortgage balance.
In 2010, President Obama signed the Dodd-Frank Act which purported to tighten the requirements to procure a home mortgage. Applicants with low credit scores were particularly affected.
One’s credit score depends upon a number of factors. The first factor is which credit score the lenders are using. The FICO score, created by Fair Isaac, is the predominant scoring model used in the housing industry. Approximately 90% of the mortgage lenders use FICO.
There are five main factors that determine a FICO score, and each factor has its respective weight or importance. 35% of the FICO score is determined by payment history, 30% by credit utilization, 15% by credit age, 10% by different types of credit, and 10% by number of inquiries.
An alternative to the FICO scoring system is Vanguard. Vanguard was developed by TransUnion, Equifax, and Experian, and is becoming more popular among lenders. Vanguard considers such factors as the amount owed, age of accounts, and payment history.
Both FICO and Vanguard put heavy emphasis on payment history. Therefore, it is important for credit score purposes that any debt taken be paid promptly and fully.
Lenders can and will take into account factors other than the FICO or Vanguard credit scores. Such factors include whether the applicant has stable employment, the length of the employment, and the annual income of the applicant.
Such compensating factors may aid an applicant with bad credit in obtaining a home mortgage. Likewise, an applicant with a good credit score may be harmed by unstable or unsteady employment, and low income.
Other factors that may be relevant in obtaining a home loan, other than credit score, may include low debt to income ratio, high income, a large amount of money in savings, assets, and the size of the down payment.
What are the factors that can assist in obtaining an affordable mortgage?
Collect the documents and information that are generally required when applying for a home mortgage. Among the documents generally required are tax returns from the last year, bank statements, pay invoices, investment or retirement account statements, W2s, and a list of the applicant’s debts, included the amounts owed and monthly payments.
Co-signors may be helpful, especially if the co-signor has a good credit rating. A family member or close friend may be willing to co-sign the mortgage or loan. Additionally, a family member or close friend may be willing to add the applicant as an authorized user to one of their accounts. Some estimate one’s status as an authorized user can increase the credit score as much as 30 points.
Paying down one’s debts generally will have a beneficial impact on one’s credit score. Lenders generally like applicants who have a debt to income ratio of less than 30%. Debt to income ratio is an important consideration given by lenders.
Fix your credit. According to the Federal Trade Commission, 20% of Americans have an error on their credit report. Disputing inaccurate information and removing bad remarks can help one’s credit dramatically. Some creditors will also agree to a “pay for delete” arrangement whereby the creditor will remove a damaging remark upon payment of the obligation.
Provide other documentation showing that the applicant is a responsible consumer. For example, utility bills for the last 12 months, a letter of recommendation from a landlord, or evidence of insurance premium payments, or automobile payments can illustrate that the applicant is prompt and responsible in the payment of his or her debts.
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