Buying a home and your Credit Scores

Well, they've done it again. Just when we need a boost to this dreadful economy Fannie Mae has yet again increased credit score requirements for mortgage loans. What happened to the good old days when a 620 credit score would get you an attractive loan with no money down? For the moment don't even think about it.

Less than a year ago a 680 credit score was considered somewhat good. Arguably it still is. Unfortunately if you have a score below 720 expect to pay a higher interest on your mortgage. Crazy, I know. Since the average credit score is 680, most of us will be paying higher rates than those with credit scores above 720.

FICO range and applicable APR's are as follows: 720-850 5.66%; 700-719 5.79%; 675-699 6.32%; 620-674 7.47%; 560-619 8.53%; 500-559 9.29%

These figures give you an example of how lenders charge different rates for variances in credit scores. There are other factors associated with being approved for a mortgage loan and what interest rate you should expect.

There are currently several factors that go in to buying a home and whether or not the lender will approve the transaction to go to the closing table. As we've just discussed, your credit score is at the top of the list.

The next factor is your ability to make the payment. Verifying your income is key to determining how much home you can afford. If you are self employed expect to provide your last two years tax returns. Round up all schedules because your mortgage broker will need it all. It is your net income that will be used to qualify so if you are one of those that write it all off, you may be renting for quite some time. Wage earners will simply to provide W2 forms for the last two years along with a recent pay stub.

Down payment is something that is relatively new since the collapse of the mortgage industry. By all means this is one of the main reasons Wall Streets ice cream turned to crap. Way too many people bought homes with no skin in the game. This made it way to easy to walk away leaving the bank holding the bag. FHA loans require a 3.5% down payment, up .5% from last year. Expect to put 5% down on a conventional loan.

The last piece of the puzzle is the collateral itself. With declining markets raging all across the country, the home must pass several tests from appraised value to the overall condition of the property. The bank doesn't want to loan money on a trashed out dump.

Historically interest rates are still at record lows. 680 credit score or 780 credit score, you are still borrowing money at well below the average cost. Be prepared and understand what its going to take to qualify. You may even want to get your free credit report before you even make a loan application.