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Monitor Your Credit Score as Part of Your Investment Strategy

By Michele Lerner

Years ago, consumer credit scores were part of an overall picture that lenders and credit card companies used to evaluate the risk of a default. When credit standards tightened as a result of the housing crisis and recession, credit scores gained in importance. Fannie Mae and Freddie Mac conducted studies to evaluate which borrowers were more likely to default on a loan based on a variety of characteristics and discovered a direct correlation between a low credit score at the time of a loan application and eventual default.

Lenders will look at other factors such as debt-to-income ratios, employment history, income and assets in addition to the credit score. A high level of savings or a low debt-to-income ratio may offset a low credit score in some cases and allow consumers to qualify for a mortgage, but the credit score is still paramount in determining the mortgage rate.

Borrowers with credit scores of 740 or higher typically will qualify for the lowest mortgage interest rates, but starting in 2007, Fannie Mae and Freddie Mac introduced risk-based mortgage financing which has tiers of interest rates tied to credit scores. Borrowers with credit scores of 620 and under may not qualify for a mortgage loan at all, while consumers with scores in between 620 and 740 will pay various interest rates depending on their score.

Mortgage borrowers will see a dramatic difference in monthly payments depending on their credit score. For example, at MyFico.com, a $216,000, 30-year fixed-rate home loan was recently quoted at 4.26% interest for borrowers with the highest credit scores within the range of 760 to 850. At that rate, the monthly payment is $1,064. For borrowers with credit scores of 620 to 639, the interest rate would be 5.85%, with a monthly payment of $1,274. A high credit score in this example saves $210 per month on the mortgage payment or $2,520 annually.
For property investors looking to refinance or take on a new mortgage for an investment, maintaining a high credit score should be of paramount importance.

All consumers can check their credit report for free once every year at www.annualcreditreport.com. MYFICO.com has extensive information about how credit scores are determined and how to improve your score. Basically, consumers should pay all their bills on time and maintain a low balance on any credit cards, preferably at 30% or less of the limit. While consumers with credit card debt may be tempted to close an account once it is paid in full, it is actually better to have open, underutilized credit lines to demonstrate that you can handle credit.

Most lenders will assist loan applicants in evaluating their credit report and can show consumers how to improve their score. Investors should be more careful than anyone to maintain a high score of 720 or 740 or above to minimize the costs of their financing.


Michele Lerner, a real estate expert and freelance writer with 20 years of experience, is the author of “HOMEBUYING: Tough Times, First Time, Any Time”.


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