If you're thinking about buying a home or refinancing, you've probably heard about credit scores. So, what is a credit score, and how does it affect you?
Understanding the link between your credit score and your mortgage
The idea of credit scores became real in the 1960s. A company called Fair Isaac Corp came up with a way to summarise credit reports in the form of a score. This score, called a FICO score, could be used by lenders to figure out if a possible borrower has good credit. The best possible FICO score is 850, and the worst is 350. The type of loan you get will depend on where you fall on the scale.
To cut to the chase, your credit score is a summary of how trustworthy you are. It shows a lender how you have handled your money over time. If you haven't paid your credit card bills on time often, the lender will think it's likely you won't pay your mortgage bills either. Obviously, that will lead to your loan application being turned down or to harsh terms that favour the lender.
As you might expect, your credit score affects both whether you get a home loan and the terms of that loan. The better your position, the more points you get. A FICO score above 800 is thought to be perfect credit, but almost no one has a score that high. In fact, most lenders wouldn't believe such a score and would likely do more research.
Most people seem to score between 500 and 600. Even though this could mean trouble with a lender, it doesn't. Lenders rarely expect someone to have a perfect credit score. Instead, they look for mistakes. The shades of grey in your score and how lenders read them will determine whether you get a loan and on what terms.
Lenders look at these shades of grey based on how risky they are. In general, a score between 720 and 850 is good, while a score between 500 and 560 is high risk. 560 to 620 isn't very good, but 675 to 720 is good to fair. The average score is between 620 and 675. There are lenders who will give loans for each of these ranges, which is very important. Your score is mostly just an indicator of how good or bad of a deal you will get.
If your credit score is high, you should work hard to get the best mortgage deal possible. If your credit score is between 300 and 500, you will probably have to take what you can get.
