Qualifying for a home loan just got trickier. With defaults and foreclosures still plaguing the mortgage industry, lenders are evaluating how risky potential borrowers are by heavily weighing credit scores.
Before the credit crunch, a credit score of 620 and above could get you the best interest rate.
But mortgage giants Fannie Mae and Freddie Mac recently established a tier system that penalizes borrowers with scores below 680 by increasing interest rates.
The past three years or so, mortgage companies haven’t placed a large focus on credit scores, said Robin Simmons, assistant vice president of real estate lending at Desert Schools Federal Credit Union. Now, lenders are looking at their risks and the hits they’ve taken, Simmons said.
“(It’s) probably the folks who can least afford it, unfortunately, who are going to be paying more for their mortgages,” she said.
Under the system, a borrower with a score of less than 680 could see an interest rate increase ranging from 0.25 percent to 1 percent.
For example, someone with a score from 660 to 679 will have a rate increase of 0.25 percent. On a $300,000 loan, that borrower could pay $2,250 in upfront costs to buy down the interest rate.
If a person doesn’t have enough money to buy down the rate increase, he might qualify for less home, said Jeff Underwood, a loan officer with AmeriFirst Financial in Mesa. A score lower than 680 can now also raise a borrower’s mortgage insurance rate, Underwood said.
With the added emphasis on scores, experts say it’s crucial for people to work on improving their credit rating.
One of the most important steps is making bill payments on time, Simmons said.
Being late on a mortgage payment even once can lower a borrower’s score by 50 points, Underwood said.
People should also be selective about taking out new forms of credit, Simmons said. If they open up too many new credit card accounts, lenders may take it as a sign “that they might be a little bit strapped financially,” she said.
Closing credit card accounts once paid off could also hurt a person’s credit score, since it lowers the amount of available credit.
A potential home buyer should start the loan process at least six months ahead of time so the loan officer can assess hurdles, Underwood said. That extra time may allow a person to work on building credit.
People also need to maintain budgets, Underwood said. With automatic bill pay online, many people don’t realize how much they’re spending, he said.
And borrowers need to check their credit reports for any errors, Underwood said.
Borrowers can obtain free credit reports once a year from the three major credit reporting agencies — Equifax, Experian and TransUnion — by going to www.annualcreditreport.com.
No clear rule exists on how many months it could take to repair a person’s credit, Simmons said. It’s taking a chance to wait on buying a home because interest rates could rise or home prices could decline, hurting an owner’s ability to refinance, she said. “There’s not really any magic number we can tell people,” she said.
Improve your credit score
• Pay bills on time.
• Keep balances low on credit cards.
• Don’t close unused credit cards or open new ones just to increase available credit.
• Don’t open new accounts too quickly.
• Do rate shopping within a short period of time.
• Be aware that paying off a collection account won’t remove it from your credit report. It stays on for seven years.