Taking out a mortgage is often times the first major financial purchase of one’s life. Finding a mortgage involves many decisions including: (1) which lender to choose; (2) what type of loan you would like to utilize; (3) how much money you would like to take out; and (4) the term of the loan. Below we discuss how your credit score will affect your ability to obtain a mortgage.
Banks and lending institutions will provide an individual with a mortgage and in return collect interest on the money the individual has borrowed over the life of the loan. Interest is affected by: (1) your interest rate; (2) the amount of money borrowed; and (3) the type of loan you have chosen.
While there are multiple factors, banks and lending institutions will review your FICO credit score when determining your mortgage rate. Your FICO credit score is reported by the three major credit bureaus: Equifax, Experian, and Transunion.
Your credit score can be affected by:
Based off of the above, you will be assigned a credit score. Lender’s typically review your credit score in comparison to a debt to income ratio in determining your interest rate.
With that being said, those with a credit score of 740 or above are likely to receive the best rate. However, those with a credit score of 620 or below will have a hard time obtaining a mortgage, but it is not impossible. Your lender may be able to work with you to increase your credit score and thus obtaining a mortgage. For those who fall in the middle, scores will vary by credit score. See examples below.
Examples based on purchase of $200,000.00 home.
Ex. 1 – Adam’s credit score allows him to obtain a 30 year fixed mortgage at 3.92 percent. Adam will make payments in the amount of $898.00 per month.
Ex. 2 – Bill’s credit score allows him to obtain a 30 year fixed mortgage at 4.5 percent. Bill will make payments in the amount of $1,013.00 per month.
As we see from the above examples, over the life of the loan, Bill will be making an additional $115.00 per year, or an additional $41,400.00 over the life of the loan.
Your credit plays a major role in the mortgage application process. Your credit will determine whether you will be approved for a mortgage, the amount of money a bank or lending institution is willing to give you, the amount of down payment that will be needed, and your interest rate.
Niko Law LLC is an Illinois law firm. As the firm practices law in the State of Illinois, only, this website and e-newsletter focuses upon that jurisdiction, only. Please keep in mind Niko Law LLC does not guarantee results and that law can vary dramatically from state to state, county to county, and it is not reasonable to assume that law in other jurisdictions will be the same as, or even similar to, Illinois law.
This e-newsletter should not be construed as legal advice, nor used in lieu of a lawyer.
For questions regarding your specific situation, please contact Niko Law LLC at 708-966-9388.
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