By Leonard Baron
If you are thinking about buying a home, one of the first things you should do is go to a lender to get pre-approved. This will determine how much money you can borrow on a mortgage. This will also help you filter your home search by sale price, which will narrow your choices within your financing range.
So how does a lender evaluate — called underwriting — and determine how much you can borrow? It involves the three C’s: Credit, capacity and collateral!
Credit or FICO Score
The first item a lender will review is your credit profile, also known as your credit score or FICO score. This can range from 350 – 850. This is where all the decisions you’ve made in the past regarding will be reflected, such as:
- How much debt you have outstanding
- How much debt you have outstanding as a percentage of open credit accounts
- How much debt you have in the different types of credit accounts (credit cards, car loans, school loans, etc.)
- How well you’ve paid your bills over the years
Lenders used to allow much lower credit scores for borrowing purposes, but they’ve gone up the past few years. You need, in general, at least a 640 FICO score to borrow on a loan. The optimal score is 740-760 or above. The lower your score, the higher your interest rate and points on your mortgage loan.
[Related: Estimate your credit score]