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Home Buyer's Recession Survival Guide - Your Credit Score And Your Mortgage

Updated on May 26, 2009

There are many people who complain loudly about how they are being unfairly discriminated against because they have a low credit score. It would behoove these individuals to take a good hard look at why their credit score is low. If they have been messing around their credit card company on a $1,000 credit line by sending in payments more than 90 days late (which is technically called a Delinquency), what signal does that send an investor who is contemplating lending them 100 or 200 times as much?

If the company bozo who is notorious for borrowing lunch money and never paying it back hit you up for a loan to buy his new Plasma TV, what would you say?

There is a clear, statistical connection between credit score and mortgage delinquency which has been scientifically proven over the millions of people who hold mortgage loans. The chances of becoming over ninety days delinquent on mortgage payments relative to your FICO credit score is as follows:

595: 2.25 to 1
600: 4.5 to 1
615: 9 to 1
630: 18 to 1
645: 36 to 1
660: 72 to 1
680: 144 to 1
700: 288 to 1
780: 576 to 1

Let's put it another way. If a lender finances a mortgage to nine different people with a credit score of 595, fully four of them will go delinquent! That is an amazing number! Yet, if that same lender finances 576 people with a credit score of 780, only one of them will go ninety days past on their payments.

This goes way beyond capitalism. This is just sheer common sense. The investor would have to loan money to 2,304 borrowers with a FICO of 780 to end up with exactly the same number (not percentage, mind you, but individuals) of delinquent accounts as if they financed just 9 borrowers with a 595 score: Four!

It gets even wilder when you reach the albeit rarefied level of an 800 FICO score. The investor would have to lend to 20,000 people with this credit rating to get four delinquencies.

Therefore, the mortgage investor who is not in the business of spending all his time chasing up deadbeats is going to want to make his money advantageous to people with high credit scores by facilitating low interest rates and terms, and less advantageous to the people south of 600 by enforcing high interest rates and difficult terms.

Hey, wouldn't you do the same if it was your money you were lending out?

Also keep in mind that the real estate conflagration of the past few months has turned the credit market on its ear and the previous standards may not continue to precisely apply. It's become a very strange, wild, and wacky credit world out there!

There are various aspect that a Mortgage lender looks at before approving a mortgage, especially if it's a risky High Ratio, or Low Down Payment loan:

- Your credit background. Are you likely to repay the loan or are you a foreclosure risk? Are you aware of what is on your credit report? You can easily request it for free from the credit bureaus, or consumer reporting agencies as they're now referred to. Make sure that you get a copy of your TransUnion, Experian and Equifax reports as each can carry different information.

- Reasonable appraisal value. Is the house worth the purchase price or is it inflated? Lenders are well aware that the trend of residential prices right now is down, and they will always adopt a longer term vision when it comes to minimizing their risk of getting stuck with a foreclosure that they can't flog for the amount they have locked up in it.

- Monthly Income. Can you pay all your bills, including the mortgage, with well less than 50% of your gross, pre-tax salary? The FHA has as its "Maximum Allowable Monthly Housing Expenditure plus Long Term Debt" 41% of your gross pre-tax income. Conventional lenders may be as low as 32%. If you're over this limit, according to the lenders you're a foreclosure waiting to happen.

- Is the cash currently available to pay the downstroke and closing costs? A lender doesn't want to hear that your Dad will be putting the money into your account when it's time. The time is now. Have the funding available and verifiable prior to application.

- Cash on hand. The lender likes to see your bank account hold the equivalent of at least two months' payment. If you are the type that never lets the average balance head over three figures, that can flag trouble ahead to the lender. You don't have to keep it in your checking account, but it should be in a savings account somewhere that the lender can verify it.

You are wise to have all this sorted out before you apply, as once the application process has started it might be too late to minimize the damage. But if you're able to meet all the requirements, it could be smooth sailing ahead!

Read The Entire Survival Guide

Home Buyer's Recession Survival Guide - The Subprime Meltdown
Home Buyer's Recession Survival Guide - The Advantage Of Renting Over Buying
Home Buyer's Recession Survival Guide - Why Rent? Why Not?
Home Buyer's Recession Survival Guide - Five Common Mistakes House Buyers Make
Home Buyer's Recession Survival Guide - Get Your Home Sold Quickly & At Your Asking Price
Home Buyer's Recession Survival Guide - Improve Your Home's Value And Sell It For More!
Home Buyer's Recession Survival Guide - Learn The Value Of Curb Appeal
Home Buyer's Recession Survival Guide - Home Staging: Valid Selling Technique Or Fraud?
Home Buyer's Recession Survival Guide - Before You Go House Shopping
Home Buyer's Recession Survival Guide - The Home Condition Checklist
Home Buyer's Recession Survival Guide - Getting A Mortgage From Different Types Of Lenders
Home Buyer's Recession Survival Guide - What To Do After You're Turned Down
Home Buyer's Recession Survival Guide - New Initiatives To Help Get You Approved
Home Buyer's Recession Survival Guide - Isn't HUD An Old Paul Newman Movie?
Home Buyer's Recession Survival Guide - Jumbo Isn't As Huge As He Once Was
Home Buyer's Recession Survival Guide - FHA Q&A
Home Buyer's Recession Survival Guide - The FHA's Credit Requirements Vs. The Bank's
Home Buyer's Recession Survival Guide - Your Credit Score And Your Mortgage
Home Buyer's Recession Survival Guide - Credit Score Confusion
Home Buyer's Recession Survival Guide - Keeping That Credit Score Nice & High
Home Buyer's Recession Survival Guide - Minimize The Interest Payable
Home Buyer's Recession Survival Guide - What Is PMI & Why Do I Care?
Home Buyer's Recession Survival Guide - The LIBOR-COFI-COSI Alphabet Soup
Home Buyer's Recession Survival Guide - REO: Get Rich Quick Or Just Waste Time?
Home Buyer's Recession Survival Guide - Obtaining Flipping Money
Home Buyer's Recession Survival Guide - Consider The Additional Costs
Home Buyer's Recession Survival Guide - What Is Escrow?
Home Buyer's Recession Survival Guide - Tips To Avoid Foreclosure
Home Buyer's Recession Survival Guide - The Changing Value Of Your Mortgage Dollar
Home Buyer's Recession Survival Guide - How To Ride The Interest Rate Spikes
Home Buyer's Recession Survival Guide - Can't Get A Mortgage? What A PITI!
Home Buyer's Recession Survival Guide - Calculating Your Closing Costs
Home Buyer's Recession Survival Guide - Mortgage Broker or Mortgage Banker?
Home Buyer's Recession Survival Guide - The Magic Of A Down Payment
Home Buyer's Recession Survival Guide - A Refinance Checklist
Home Buyer's Recession Survival Guide - Refinancing With Bad Credit
Home Buyer's Recession Survival Guide - The Self-Employed Mortgage Maze
Home Buyer's Recession Survival Guide - VA Loans
Home Buyer's Recession Survival Guide - Offset & Reverse Mortgages
Home Buyer's Recession Survival Guide - The Reasons To Not Buy An Offshore Retirement House
Home Buyer's Recession Survival Guide - How To Pay Less Than $500 A Month
Home Buyer's Recession Survival Guide - Five Easy And Cheap Tips To Save Big $ On Energy

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