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Understand Your Credit Score
Credit scoring has an huge impact on a borrower’s ability to purchase a home. It is critical to understand your credit score because it can mean the difference between getting a good interest rate and the home of your dreams, or whether you can even qualify for a mortgage at all. For this reason, it is important to understand the credit scoring process, and know what your credit score is when you look to obtain mortgage financing.
What the credit scoring model seeks to quantify is how likely the consumer is to pay off their debt. Credit scores can range between a low score of 300 and a high of 900. Here is a chart that illustrates how an underwriter interprets the score in terms of risk, and how the interest rate is affected:
Table based on sample data. Call for current rates.
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Credit Score
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Average Interest Rate
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Credit Risk
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500-559
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12%
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High Risk
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560-619
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8.50%
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Caution
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620-674
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7.65%
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Questionable
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675-699
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7.12%
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Fair
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700-719
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6.90%
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Good
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720+
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6.75%
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Excellent
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35%: Payment History - Paying debt on time and in full has a positive impact. Late payments, judgments and charge-offs have a negative impact. Delinquencies that have occurred in the last two years carry more weight than older items.
30%: Outstanding Credit Balances - The ratio marking the difference between the outstanding balance and the available credit is important here. The lower the balance the better.
15%: Credit History - The length of time since a particular credit line was established.
10%: Type of Credit - A mix of auto loans, credit cards, and mortgages is more positive than one credit type.
10%: Inquiries - The number of inquiries that have been made on a consumer’s credit history within a six-month period.
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