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Given that the sub-prime crisis played a large part in the recent economic meltdown, lenders these days are much more concerned about lending to sub-prime borrowers or borrowers who have low FICO scores. A FICO score is a good indicator of a customer's ability and willingness to repay a mortgage. While there is no clear-cut rule about what constitute a good credit score, most lenders require borrowers to have a minimum FICO score to buy a house at the prime lending rates.
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These days whether you like it or not, credit history is an important aspect of every one's lives. Lenders look at the credit score to decide whether they want to lend money to you or not and an excellent good credit score makes a person eligible for the best interest rates. Potential employers and landlords look at the credit history of an applicant before hiring/renting. Thus a good credit history may open many doors for you, while a bad credit history needs immediate repairing efforts.
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What is a FICO score?Investopedia defines a credit score as 'A type of credit score that makes up a substantial portion of the credit report that lenders use to assess an applicant's credit risk and whether to extend a loan'. As per their website, FICO is an acronym for the Fair Isaac Corporation, the creators of the FICO score. A FICO score is calculated by taking into account the payment history of a person, his current level of indebtedness, types of credit used in the past and length of credit history, and his new credit. A credit reporting agency calculate these values and assign a numerical value that is an indicator of a person's credit risk. A FICO score will generally range between 300 and 850.
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What Constitutes a Credit Score and What is Good Enough for Prime Rate Loan?Although lenders may look at several other factors such as income, number of years at the present employment, number of years at the present address and so on, one significant factor affecting their decision is the credit score. Experts differ on what constitutes a good credit score but generally a credit score above 700 is considered to be good, while those who have credit scores above 720 typically gets the best interest rates.
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In order to be eligible for a mortgage at prime lending rates, lenders typically ask for a credit score of 620 or above. Anything less than 620 is considered to be high risk and may not qualify a person for a mortgage at favorable lending rates. Of course this is only a general guideline. Lenders may look at several other factors before they agree upon on an interest rate. It is often a good idea to ask a mortgage officer about their current lending practices if you feel that you may not be eligible for a prime rate loan.
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Since credit scores play such a big role in determining the interest rates, it may be a good idea to build a good credit score before going for major purchases such as a house or a car. Small things such as paying bills on time, keeping the credit card balances low and above all living within ones means can have a huge impact on the credit score. Instead of going for a sub-prime loan, sometimes it pays to wait a little more and get a better credit score to purchase a house.
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- FICO Score definition- http://www.investopedia.com/terms/f/ficoscore.asp
- Experian Credit Information Center- http://www.experian.com/credit-education/all-about-credit.html#build
Image Credit: TheTruthAbout, http://www.flickr.com/photos/thetruthabout/2720239113/