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Qualifying for a Mortgage with Less-than-Perfect Credit

Lenders use credit ratings from FICO to assign you to a risk category. Your FICO score is a "grade" for your financial management. You should do well if you pay bills on time, request credit prudently and keep what you owe under 50% of your available credit. On the other hand, if you have made late payments, have high debt levels, or have requested a lot of new credit within the past year or so, your score will be lower. If you have bills in collection, declared bankruptcy, or have been subject to judgments or liens, your score will probably plummet.

Lenders are assuming greater risk to provide a mortgage to somebody with a low credit score. Typically, they either deny credit entirely or offer less favorable rates as compensation for the additional risk that they are taking.

For example, right now a person with the highest credit rating might pay 3.336% on a $200,000 loan, for a monthly payment of $800 and interest payments of $116,757 over the life of the loan. A person with a credit score in the 640-659 range would probably pay at least 1 to 2% more, boosting monthly payments to $1,000 and interest payments to $159,953.

What can you do if your credit rating has room for improvement?

  • Put down a large down payment. Substantial financial investment in your home means that you are less likely to walk away from it if you have financial difficulties. Your lender will be more inclined to view your application favorably.
  • Reduce or eliminate your existing debt. By trimming existing debt, you free up funds available for loan payments and reduce the risk to your lender.
  • Get a co-signer for the loan. You can qualify for a better rate if you have a family member or friend with an excellent credit rating co-sign the loan for you. We sometimes see parents co-signing loans for adult children who are just getting started building a career and a credit rating. While co-signing can reduce risk for the lender, it can be extremely hazardous for family relationships, so use caution with this approach.
If you have questions about how your credit score will affect your mortgage, please give me a call at 888-524-1183.

June's Home Value Improver

Remodeling That Pays Off at Resale

Summer is a great time to spruce up your home, but don't expect to recoup all the money that you spend on remodeling when you sell your home. According to a 2012 report from Remodeling magazine's 2012 report, New England homeowners can expect to recover 73% of the cost of an entry door replacement, but only 51% of the cost of a bathroom addition.

Here are the 10 New England remodeling projects that deliver the biggest return on investment at resale time:

Project                                          Cost Recouped
Entry Door Replacement (steel)             73.0%
Attic Bedroom                                      72.5%
Minor Kitchen Remodel                         72.1%
Garage Door Replacement                    71.9%
Deck Addition (wood)                           70.1%
Siding Replacement (vinyl)                   69.5%
Window Replacement (vinyl)                 68.0%
Window Replacement (wood)                67.5%
Basement Remodel                              66.8%
Major kitchen remodel                          65.7%

Westchester Mortgage

June 2012

The credit scores used by lenders come from Fair Isaac Corporation, better known as FICO. FICO has reported an interesting trend for 2012. The number of people with excellent credit scores in the 800-850 range is at its highest level since 2008. On the other end of the spectrum, more people posted a score in the 550-699 range than in any year since 2006. Meanwhile, the number of people between the highs and the lows has declined.

If your credit is in the highest group - congratulations! You'll enjoy better interest rates and have an easier time getting a loan. If your score is on the low end, we've provided a few tips in this month's feature article to help.

As always, please give me a call if I can answer any questions or help you find the mortgage you need!

Best regards,
Debbie Siegel
Westchester Mortgage

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