Wednesday, June 19, 2013, AM | Leave Comment
The most important and probably the only criterion for getting mortgage loan at the most favorable and lowest rate is to improve and raise your credit score to as high as you possibly can. The higher the score, the lower the interest rate. Of course, at both ends of the spectrum, as with anything else, there is always a limit to what you can get.
The limit is put on the highest credit score beyond which you cannot use it to your advantage. On the same token, there is a limit to how much lower interest rate you can get.
You cannot get ZERO percent interest rate. No institution is that crazy.
That means your best option is to work within the system and beat the lending institutions of all kinds at their own game.
You cannot beat them 100% because they are in the business of making money off of your loan. They know at what interest (less) they got the money and at what interest (more) they are going to give you the loan.
That’s the basic mantra for getting loan to your advantage. It takes time, due diligence and some financial arm twisting in your household to improve your credit score in order to get loan at a lower interest rate.
Credit keeping and reporting companies use different formulas to come up with their own credit score – one of which is the widely used FICO system. The first thing you gotta do is to understand how FICO credit score works.
Two government agencies set the lending standards?
There are two government agencies for the purpose of setting lending standards for most mortgages sold in the United States: 1) Freddie Mac and 2) Fannie Mae.
The following criteria are generally used by the credit institutions to give you a loan at a certain interest rate for different credit scores.
If you have credit score of
740 or more
Also if you can make a down payment of at least 20 percent, you can avoid extra loan charges that could effectively raise the mortgage rate. You are living in financial heaven. Wall Street Journal ran a story under the heading “Mortgage Lenders Ease Standards for Safest Borrowers.”
700 to 739
You typically face additional charges of one-quarter to three quarters of a percentage point of the loan amount. You are close to financial heaven.
680 to 699
The interest charge is 1.5 percentage points extra. You are losing it, getting close to financial hell.
660 to 680
The interest charge is 2.5 percentage points extra. You are feeling the heat on your financial face. Before it burns you financially, talk to someone, find a good financial adviser.
Score less than 660
You have to work real hard to get your score higher. First off, get your free annual credit report now. Don’t wait till tomorrow. Make sure all information is correct on your report. Then start working on improving your credit score.
Finance experts tell us that Fannie and Freddie started aggressively increasing prices on loans to higher-risk borrowers in 2008.
Many more experts say credit scores of 680 are common among people who have taken on several credit cards with high spending limits – even if the borrowers carry low revolving balances.
In a Nutshell
No matter what your credit score is presently, there is always room for improvement – for most of us anyway.
So starting today, or maybe you have already started, work harder and smarted towards improving your credit score to the point that the banks give you loan of any kind at an interest rate to your advantage.
The very last point (6) above should be of extreme interest to us all.
Don’t take on several credit cards with high spending limits.
This one point is one of the many to improve your credit score, extremely important nevertheless.Facebook.com/doable.finance