What Credit Score Do I Need for a Mortgage?
July 11th, 2011 | Author: Stephanie
Since the credit crunch of the mid to late 2000s, credit and lending companies have become stricter in doling out loans. This is due in part to the decline of the American economy brought about by careless loan approvals and irresponsible loan borrowers. What was once seen as an acceptable credit score for a mortgage three years ago is now considered subprime. Similarly, credit scores that used to get affordable interest rates before now have interest rates that would have been regarded as unreasonable.
Like all other loans, lenders will always use a client’s credit score to determine whether he could be allowed to be given a loan. This credit score reflects the borrower’s capability to pay. Therefore, it also indicative of the risk level the borrower poses to the lender.
Lending companies normally have an average accepted credit score for a mortgage as with other types of loans. Furthermore, if a client is accepted for the loan, his credit score will also determine how much interest he has to pay while the loan is still active.
Four years ago, a 650 credit score for a mortgage would have given the borrower prime rates. These prime mortgage loans would give the borrower the best interest rates which were lower than the average interest rate of the market that time.
However, the present state of the economy has changed all that. Since the start of the economic
recession, the minimum credit score needed to get a mortgage has risen from below 500 to 650. What was considered a prime credit score has now become subprime instead.
Currently, any score below 600 will still qualify a borrower for a mortgage loan. However, this will probably translate to interest rates that are well above average and more expensive than usual. A 650 and above credit score for a mortgage is now considered acceptable and will give the average interest rates. The best mortgage rates at present are given to borrowers that have a credit score of at least 730, which used to be just 650 a couple of years ago.
It is important to note that even though a loan for a bad credit score can still be approved. the lender will not come in the form of traditional sources such as banks and established lending companies. Instead, borrowers with bad credit are left to borrow from non traditional sources such as small lending companies that charge extravagant fees and monthly interest rates. Because these small companies do not need a high credit score needed for a mortgage loan, they usually give interest rates that are almost the maximum for their states.
Getting a mortgage loan can damage an already bad credit score when the lender evaluates it from any of the three credit bureaus. This is why it is important to know one’s credit score as well as the accepted credit score for a mortgage loan before even applying for one.