Credit Score and Mortgage: Five Surprising Things You Don’t Know
Most homeowners believe that preparing to apply for a mortgage or a refinance includes presenting a strong credit score. After all, a record of making payments in full and on time goes a long way toward showing lenders they will be responsible enough to pay back the mortgage loan. However there's more to the relationship between homeowners and their credit scores. Here are five little known facts to keep in mind.
Low Credit Scoring Borrowers May Still Qualify for a Mortgage
Borrowers with a low credit score may still qualify for a mortgage. In fact, it's easier now than it has been for a few years to get a mortgage with a lower score, according to the 2014 second quarter data from government-sponsored Fannie Mae and Freddie Mac. The average credit score for approved mortgage loans has dropped from a high of 762 in 2010, to 744 in the second quarter of 2014.
A Spouse's Low Score May Equal a Higher Mortgage Interest Rate
Even though marriage doesn't create joint credit scores for spouses, their respective scores and histories do impact joint credit applications. Lenders look at each applicant's credit score and history as indications of loan default risk. A higher risk means a higher the rate, and a higher chance the mortgage application could be declined. Lenders look at the lowest score of a joint application. If one spouse has a significantly lower score than the other, this can push the interest rate up for the couple's mortgage.
Paying Down Credit Card Balances May Be Better than Paying Down a Mortgage
Homeowners with a little extra cash may pay down their mortgage hoping to boost their credit score, but paying down credit card balances may make more sense. One of the factors in a credit score is the utilization rate, which is the amount of credit actually used versus the amount of credit available. For example, a consumer with $10,000 in available credit and balance of $4,000 has a utilization ratio of 40 percent. Making a payment to reduce the balance lowers the utilization rate, and may help improve the credit score.
Community Property States Look at Spouses Credit Profiles
Sometimes borrowers whose sole income can support a mortgage avoid putting a low-scoring spouse on an application aiming to improve the interest rate and reduce the chances of a decline. However married couples who live in one of the United States' community property states may be in for a surprise. In California, Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, lenders can take a spouse's credit score and history into consideration — even if they aren't on the mortgage application.
For government-backed mortgages in these states, the spouse's credit is checked even if he or she won't be on the home's title or the mortgage, and his or her debts are included in the debt-to-income calculations. HUD says that a non-purchasing spouse's bad credit should not cause a mortgage to be declined, but non-government lenders may impose different guidelines. In addition, collections and judgments associated with the non-purchasing spouse still have to be included as community debt.
Credit Scores Can Affect Homeowners Insurance Premiums
Lenders aren't the only ones looking at homeowners credit ratings. According to the National Insurance Association of Insurance Commissioners, consumers' insurance-based credit scores comprise elements of their credit history — many of the same elements that are used to calculate their lending credit score. The length of the credit history, repayment record, outstanding debt, the pursuit of new credit and the credit mix (credit cards, loans, mortgages, credit lines, etc.) are all contributing factors in both types of credit scoring.