Why can some people get a loan easily and others don’t? This is a big question given the fact that lots of people are rejected or sold loans on very burdening terms. The situation is such that we cannot borrow money unless we can prove that we give it back on time. If you have failed to make payments (even for utilities bills), you have made yourself a “negative image” that will cause you trouble. Banks and lenders analyze your financial history to see how responsible you are with your finances. Lenders check the credit report, which you can get yourself right away with a free Credit Report Card.
Three separate credit agencies are in charge of developing the credit reports. These are TransUnion, Equifax and Experian. They collect data about credit history by means of a formula created by Fair Isaac Corporation (FICO). Each agency gives you a score, and there will be slight variations among them. When you submit a loan application, lenders request that you present a credit report with all the three scores, one from TransUnion, one from Experian and one from Equifax. They will not look for the highest or lowest score, but rather for the median.
Why are credit scores decisive in the home buying process?
The interest rate and terms of the loan depend on the credit score. If the credit score proves that you are a good payer (i.e. always on time with your bills and not maxing out credit cards), then, the lender can trust you that you won’t have difficulties paying off the debt. People with a high credit score appear as a low-risk investment and therefore, lenders can offer you good terms on the loan policy and a low interest rate.
If you don’t have a “rosy-looking” credit score, you are seen as a risky investment. In order to reduce this perceived risk, lenders will approve a loan with a higher interest rate and with lots of hidden charges. Don’t go shopping for a home without checking your credit report first and finding ways to improve it.
How is the loan rate based on the credit score?
Lenders usually rely on a baseline credit score that they use when deciding when to approve or reject mortgage applications. The best score out there is 850 points (which is really rare to find). Just a small 10% of applicants have a credit score higher than 800. As long as you range between 700 and 800 points, you are in the great zone: you can get a loan with a low interest rate. It is in the 600s range that things look gloomy. Maybe a 680 score is still acceptable, but if it’s lower than 660, you can expect to be turned down.
Depending on the lender, the rejection threshold could be at 620 or 640 points. Applicants with scores in the 500s, can only qualify for loans with extremely high interest rates. You can also expect to be charged a lot of hidden fees. While the better loans are called prime loans, applicants with credit scores below 500 can only get sub-prime mortgages, which are most disadvantageous of all.
Therefore, a good score is essential when you look at the bigger picture. You may think that a 15$ penalty is not that much for missing a credit card payment. But if this is a common occurrence in your finances, then, you’ll pay that amount many times more when trying to get a mortgage or when you are in great need to refinance. Don’t treat your monthly payments lightly – deadlines are important.
Now, let’s say you have a bad credit report. It’s not the end of the world. Figures are not carved in stone. There are ways to improve your score, and even engage in credit rehab if necessary. There are currently lots of companies that sell credit repair services. While there may be good professionals among them, there are lots of disreputable ones too. Plus, they can’t work any miracle. You can do the same thing they do to improve your credit report. Don’t waste money on services that can’t help you!
Speaking from a healthy financial perspective, it is a lot wiser to apply for a loan only after straightening your credit record. If you apply for a mortgage with a negative report, you will only qualify for a sub-prime loan.
Don’t turn a blind eye on your credit report!
Neglecting to know where you stand on your credit report could cost you. It’s even advisable to check your Credit Report Card every month. This free tool allows you to break the credit score into gradable segments. You can thus see how your current debt and payment history affect the score, and you can use the provided recommendations to start improving the report right away. Moreover, the Credit Report Card allows you to receive lenders’ offers and learn who’d lend you money and on what conditions. This is a great starting point for shopping around. The credit score remains unaffected by regularly checking the credit report.