You have found your perfect piece of San Diego real estate, and now you only need secure a real estate mortgage at a great rate. Simple, right? Definitely not!
Before a mortgage makes that real estate yours, the lender is going to check your credit score, which will determine what type of terms they offer to you, how much you will pay over the life of the real estate mortgage, and even if you can secure a mortgage. Your credit score tells a lender what type of credit risk you are and the likelihood that you will repay the money loaned.
Though there are several types of credit scores, most real estate mortgage lenders use the FICO score, which was developed by Fair Isaac. The FICO is used for several types of credit and can affect terms offered for credit cards, car loans, home equity loans, private mortgage insurance, the required size of your down payment, and even the amount of documentation a lender will require of you during your mortgage application. Your score determines what type of loan for which you are eligible, as well as how much money you can borrow.
Every person has three FICO scores -- one with each of the three major credit bureaus: Experian, TransUnion and Equifax. Since the information retained by each credit bureau varies, your score will differ between the "Big Three". Before you begin hunting for real estate, it is a good idea to check all three bureaus for your FICO score, as well as right before securing a real estate mortgage. Even if you have checked your FICO scores recently, your scores fluctuate as new information is received by the credit bureaus. It is best to know for certain your FICO scores, than to be surprised during crucial negotiations.
Some of the things each credit bureau looks at in developing your FICO score are your payment history, the amounts your currently owe, the length of your credit history, new credit you have obtained, and the types of credit you use.
The Higher Your Score, the Better
There have been many commercials on television recently about the FICO score and how it follows you wherever you go (as far as credit is concerned). Just remember, the higher your score, the less you will pay to buy real estate on credit. You can save thousands of dollars every year, or you can pay thousands of extra dollars each year on your real estate mortgage, depending upon your score.
The median FICO score is 723, with most lenders requiring at least a score of 760 in order to get the best real estate mortgage terms. The highest FICO score attainable is 850; however, only 13 percent of the population score over 800.
According to myfico.com, a score of 760 or better currently makes you eligible for an average interest rate of 5.98 percent on a 30-year, fixed-rate mortgage of $216,000. The interest rate rises to 7.47 percent, if your score is between 620 and 639, which translates to paying an additional $227 each month or $81,720 for the life of the mortgage. A score below 620 can add another three-to-six percent interest. Even a point or two can make a major difference over time. As scores dip below the 700 mark, borrowers are often limited on how much money may be financed; while many lenders will disqualify you all together for a mortgage, even if the rest of your credit file is fantastic.
So, check your three FICO scores when you first decide to look for real estate. Get counseling in how to raise your scores, if it is below 760. If you must purchase sooner than you can repair your credit scores, then plan to refinance after you have raised your FICO scores. Buy real estate with terms that are to your advantage. Know your credit scores and repair any problems early.
