Credit Rating Guide
This credit rating guide guide was created to assist you in assessing
your potential credit grade and what type of terms you can expect from a
mortgage lender. Keep in mind this is merely a generic guide as some
mortgage lenders have different grading based upon their own process of
valuation.
The following primary components will determine your credit grade:
Credit
The credit is broken into three primary classes:
1. Mortgage Credit - Your payment history on your active, or past
mortgage loan. Your previous repayment history on mortgage debt will
be a solid indication of a borrowers attitude toward his/her mortgage
responsibilities. Payment history on mortgage debt is very crucial in
deciding your credit score. This obviously concerns persons who have
owned a home sometime in the past.
2. Public Records - The second class relates to public records such as
prior bankruptcies, collections, tax liens, foreclosures and judgments.
"A" borrowers generally cannot have a bankruptcy within past 10 years.
The "C" borrower could conceivably still be in foreclosure or bankruptcy at
the time of closing.
3. Consumer Credit - This class pertains to revolving and
installment credit. Installment credit covers long term
credit with structured payment programs, such as auto loans
or student loans. Revolving credit covers department
store (Gap, Macy's, Best Buy, etc.) and bank credit cards,
such as (MasterCard, Visa, Discover, etc.). Normally,
payments received thirty days past the due date are shown as
a late in your credit report. This will affect your
credit score substantially.
The bigger the credit problems, the further the score
decreases (see below). As the credit scoring on loans
decreases, mortgage lenders typically assess higher interest
rates and fees.
Max LTV also known as Loan-to-Value
LTV as it's generally referred to, is the ratio of
mortgage loan amount to the appraised value of a property.
For instance, a loan of $200,000 on a property valued at
$400,000 has a LTV of 50%. The closer your LTV is to
100%, the tighter the mortgage lenders become on credit and
debt ratio. Prior to 2008 "A" borrowers could get 100%
LTV loans and in some cases even 125% these have become
almost non-existent even for borrowers with the best of
credit. For the "D" borrower maximum loan-to-value
ratio is often much lower than 80%.
Debt Ratio
In addition to credit considerations, mortgage lenders
will review the capability of borrowers to repay their
mortgage obligation. Mortgage lenders calculate the
debt ratio by dividing the total monthly debts (the housing
expenses for the proposed mortgage loan plus the borrowers
other monthly credit obligations) by the total gross monthly
income. For instance, if total obligations for the
borrower are $2,800 ($2,000 for the mortgage, taxes and
insurance and $800 for all other credit responsibilities),
the debt ratio would be 35% ($2,800/$8,000 = 35%).
If a borrower has a low debt ratio, the grading will be
higher. Conversely, if a borrower has a high debt
ratio, the grading will be lower.
Credit Score
Mortgage lenders and other creditors oftentimes use
credit scores, called FICO scores, to decide the credit
risk. The higher the credit score, the better the
credit risk.
FICO stands for Fair Isaac Company, the company that
created the original credit scoring system. All three
credit bureau's have its own unique system which lets them
offer a score supported entirely on the contents of the
credit bureau’s data about an individual. Even so, a
numerical score at one bureau is the same as the numerical
score at another. Therefore, a score of 720 from
Experian indicates the same creditworthiness as a score of
720 from Equifax or Trans-Union, even though the
calculations used to decide those credit scores are
different at each bureau.
The scores range from 400 to 900 points, and generally, a score of
680 or above suggests a good credit history. Average FICO scores
fall into a range between 650 and 680.
It must nevertheless be mentioned that not all mortgage lenders give the
same value to all credit scores. Also, not all mortgage lenders use
the credit scoring system and even when they do they might not use the
credit scoring system for every loan program they have available. Many
small community banks still do this.
The rate of interest a mortgage lender will charge hinges
upon these four factors. If all the factors are great,
the mortgage loan is assigned an "A" grade and consequently
qualifies for the best rate of interest. If even one
of the factor is not up to par, the quality of the loan is
downgraded to A-, B, C, or D paper. "D" paper pertains
to what is called hard money mortgage loans which are
largely based on the amount of available equity in your
property and not just on your credit.
"A" paper mortgage lender's who are making a B, C or D
paper mortgage loans are taking a much higher risk because
there's an increased likelihood of the mortgage loan
defaulting. The mortgage lender is compensated for the
higher risk by giving the borrower a higher rate of interest
and making a higher rate of return:
- A- paper could have rates 0.50% - 1.50% above A
paper rates
- B paper could have rates 1.50% - 2.75% above A paper
rates
- C paper could have rates 2.75% - 4.00% above A paper
rates
- D paper could have rates 4.00% - 7.00% above A paper
rates
The interest rates quoted for A-, B, C, D paper can vary immensely from
mortgage lender to mortgage lender. Arm programs, for instance are
notorious for having huge discrepancy in rates from mortgage lender to
mortgage lender
Below are some of the typical requirements used by many mortgage lenders,
but are not absolute credit grades - mortgage lenders normally have similar,
but slightly different specs.
|
Grade |
Credit Score |
Debt Ratio |
Max LTV |
Delinquencies
within last
12 months |
Credit |
Bankruptcy / Foreclosure |
|
Mortgage |
Installment |
Revolving |
|
A to A+ |
680+ |
28-31 |
95-100 |
30 days |
0 |
0 |
1 |
Good/excellent credit during last 2-5 years. No mortgage lates within 24 months.
No bankruptcy within the last 2-10 years. |
|
60 days |
0 |
0 |
0 |
|
A- |
660 |
35 |
95 |
30 days |
0 |
1 |
1-2 |
No 60-day mortgage lates. Minimum 24-48 months since bankruptcy discharge. |
|
60 days |
0 |
0-1 |
0-1 |
|
B |
620 |
41 |
75-85 |
30 days |
1 |
2-4 |
3-5 |
24-48 months since bankruptcy discharge. Re-established credit. |
|
60 days |
0-1 |
1-2 |
1-2 |
|
C |
580 |
48 |
75 |
30 days |
2-3 |
4-6 |
5-7 |
12-24 months since bankruptcy discharge. |
|
60 days |
0-2 |
2-4 |
3-5 |
|
D |
550 |
55 |
65-70 |
60 days |
1-3 |
5-7 |
6-8 |
Bankruptcy discharged within last 12 months. |
|
Poor payment record with limited 90 day, isolated 120 day lates. |
|
E |
520 |
65 |
50-65 |
Poor payment record with a pattern of 30, 60 and 90+ lates |
Possible current bankruptcy or foreclosure. Stable current employment. |
|
Note: The numbers presented here are broad guideline and could change
from mortgage lender to mortgage lender. Exceptions are possible
with substantial compensating factors that reflect you are a low credit
risk. A few compensating factors are long-term job stability,
history of savings, history of making monthly credit payments that equal
or surpass the planned payments, a large down payment or a large cash
reserve after the close of escrow.
If you plan on shopping around for a mortgage we propose that you
take the time to order your credit report from all three credit agencies
and check it for errors. The 3 leading credit reporting
agencies are: