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What are Mortgage Credit Scores and How Can They Help You?

Mortgage Credit Scores

Mortgage credit scores are credit scores used in a mortgage transaction like buying your home. Ordered by a mortgage broker or mortgage lender, a mortgage credit score can sometimes come from a simple one bureau “infile” credit report from one of the three national credit reporting agencies – Equifax, Experian and Transunion.  However, more often than not, mortgage scores mean the three separate FICO scores – one from each of the 3 credit agencies.

Which score is eventually used in the loan depends mostly on the underwriting requirements from the lender involved.  Sometimes a mortgage loan will be underwritten on the average of your three scores, or based sometimes on the lowest score, or sometimes on the highest of the three scores, or maybe on the top two scores.  Of course, that can change also because underwriting guidelines change over time depending on the risk the lender is will to assume.

Buying a new home? Refinancing? Want to negotiate the best mortgage rate? --- Know your credit score, improve your credit score and negotiate the best price.

Your credit score will have a large effect on the interest rate you are charged on your mortgage, and thus on your monthly mortgage payments. By working to increase your credit score you should not only qualify for more loan programs, but you may also save money on your monthly interest payment.

Effect on Interest Rate

The higher your credit score, the better the interest rate on your mortgage. Even small amounts can add up to huge savings over the life of the loan. Take for example, that a mortgage lender charges you roughly 6.25% for a $150,000 mortgage if you have an average credit score from Experian, Equifax and Trans Union of 670. This credit score is nothing to be ashamed of, but increasing your score to 700 or above, may yield drastic results allowing you to borrow the same amount at a rate of  5.75%.

While this rate is only 0.50% less, you should notice that this rate is in effect for the full thirty years of the mortgage. Each month this could save you about $50 on the mortgage, an annual savings of over $600. Again, when you consider this will be over thirty years, wouldn't you like to save $18,000 by having a higher mortgage credit score?

Increasing Your Credit Score

In order to take advantage of the savings associated with a lower interest rate you will need to take steps to make your credit score higher. This can be done by paying off credit cards with large balances. However, don't close all your accounts, or you may lose all the credit history.  Instead continue to use the cards but do not carry balances, pay them off monthly and on time. Lenders will like to see that you make all your payments on time and do not have minimum monthly payments that take up a sizeable portion of your income. Creditors normally report to the credit agencies monthly, so you should see changes within a few months.