In the realm of mortgage lending, one crucial factor plays a pivotal role in determining your eligibility and interest rates: your credit score. Your credit score is a numerical representation of your creditworthiness, and it can significantly influence the outcome of your mortgage application. In this blog post, we will delve into the intricate nature of credit scores and their impact on the mortgage lending process.



Understanding Credit Scores

Credit scores are three-digit numbers that lenders use to assess the risk associated with lending money to an individual. The most commonly used credit scoring models are FICO scores, which range from 300 to 850. The higher your credit score, the lower the perceived risk for lenders, and vice versa. The 3 credit bureaus most commonly used in the mortgage world are Transunion, Experian and Equifax. The biggest difference between a FICO score and the 3 credit bureaus is that FICO is just a score while the 3 credit bureaus give more detailed information about each credit account along with a corresponding score.

Factors Affecting Credit Scores:

Several factors contribute to the calculation of your credit score, including:

1. Payment History: Timely payments on credit accounts, such as credit cards and loans, positively impact your credit score. Late payments, defaults, and bankruptcies have the opposite effect.
2. Credit Utilization: This factor measures the ratio of your credit card balances to your credit limits. Maintaining a lower credit utilization ratio is seen as responsible behavior.
3. Length of Credit History: The length of time you've had credit accounts influences your credit score. A longer credit history can be beneficial, demonstrating a track record of responsible credit management.
4. Types of Credit: Lenders consider the variety of credit accounts you have, including credit cards, installment loans, and mortgages. A diverse credit portfolio can positively impact your score.
5. New Credit: Opening multiple new credit accounts within a short period can be viewed as risky behavior and may negatively affect your credit score.

Impact on Mortgage Lending:

Your credit score is a key determinant in the mortgage lending process, influencing several aspects:

1. Eligibility: Lenders have different credit score requirements for various mortgage programs. Higher credit scores often result in more favorable terms and increased eligibility.
2. Interest Rates: A higher credit score can lead to lower interest rates on your mortgage. Conversely, a lower credit score may result in higher interest rates, as lenders compensate for perceived risk.
3. Loan Approval: Lenders may use credit scores as a primary factor in deciding whether to approve or deny your mortgage application. While not the only factor, a high credit score can also be looked at as an additional mark in the borrowers favor and vise versa.

Tips for Improving Your Credit Score:

If you're planning to apply for a mortgage, consider these tips to improve your credit score:

1. Pay Bills on Time: Timely payments have a significant positive impact on your credit score.
2. Reduce Credit Card Balances: Aim to keep credit card balances low to improve your credit utilization ratio. A general rule is to keep your credit card balance under 40% of your credit limit.
3. Check Your Credit Report: Regularly review your credit report for errors and address any discrepancies. Things like this do happen and require your attention.
4. Avoid Opening New Credit Accounts: Minimize new credit applications before applying for a mortgage.

Understanding the role of credit scores in mortgage lending is crucial for anyone navigating the home buying process. By actively managing and improving your credit score, you can enhance your eligibility and secure more favorable terms on your mortgage. Remember, a well-maintained credit history is not only a key to homeownership but also a foundation for financial success.

Jumbo Loans

In the realm of high-net-worth individuals and families, navigating jumbo loans can present unique challenges. The minimum credit score for a JUMBO loan is 700, making strong credit scores critical when applying for these loans. For loan scenarios where the loan amount exceeds the $766,550 conforming loan limit, innovative solutions become more important.

Mortgage Loan Products for JUMBO Loans

JUMBO loan programs include a 30-year fixed rate mortgage. These loans are currently offered sparingly. The market views them as riskier than a fixed rate conventional loan. Investors and lenders that do offer them usually charge origination points because of the risk associated with them.

In more recent times, a 7-year adjustable rate mortgage loan has been the program of choice for most lenders. For starters, interest rates are usually lower than a fixed rate loan which is a big selling point. These loans are usually kept in a bank’s portfolio to avoid the origination charges associated with a fixed rate JUMBO loan. Portfolio loans are owned and serviced by the bank who originated the loan and have relaxed underwriting guidelines which are more forgiving than a loan sold to an investor.

Bridge Loans

One key strategy to jumbo loans involves utilizing home equity for a down payment with a bridge loan. Fidelity Bank offers up to 80% of the home’s value, enabling clients to use this equity as a down payment or additional down payment for the desired property. This 80% includes both the current loan balance, if any, and the new bridge loan amount. This comprehensive coverage ensures that clients have access to a significant portion of their home’s equity, facilitating a more substantial down payment.

Bridge loans come with a competitive interest rate of 7.5% and a loan term of 1 year. This short-term financial bridge allows clients to secure the necessary funds without committing to a long-term financial obligation. Upon the sale of the collateral house, the bridge loan is promptly paid off. Subsequently, borrowers can leverage our loan re-casting program to pay down the purchase loan balance, providing a seamless transition to a more conventional financing structure.

Purchase Money HELOC

Another avenue to explore is obtaining a purchase money HELOC, offering clients the ability to borrow additional funds while keeping the first mortgage loan amount under the $766,550 threshold. As long as the first mortgage loan amount remains under $766,550, lending can be extended up to a 95% Combined Loan vs Value (CLTV). This increased borrowing capacity provides clients with greater flexibility in structuring their financing.

It's important to note that with the infusion of additional funds, the risk factor increases. As a result, the interest rate for transactions involving a purchase money HELOC is typically 0.125% to 0.25% higher than those without. This slight adjustment reflects the enhanced flexibility and borrowing potential offered by this solution.

Guest blog post provided by Jeff Hargate with Fidelity Bank. If you are interested in applying for a loan with Jeff, click here. 

This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.