When determining if you qualify for a
mortgage, the lender will look at your financial history
with a magnifying glass.
The lender is concerned with two
major factors:
1. Your credit report. 2. Your
credit score.
The credit report details your
payment history on your loans, any bankruptcy filings and other
important financial information. Your credit score tells the lender
what your overall creditworthiness is. In other words, what risk
there is of you defaulting on the loan?
Credit scores are often referred to
as FICO scores. They range from 300 to 900, with most borrowers
falling in the 600 and 700 ranges.
There are many factors that determine
your credit score. Your score is based on:
Past late payments. Delinquencies in
paying your bills will count against you. Studies have shown that
those who make late payments in the past will do so in the future.
The more recent your late payments are, the more they hurt your
score. A 30-day late payment within the last year will hurt your
chances of getting a mortgage with favorable terms.
Length of credit. How long your
credit history is will affect your credit score. The longer you have
had good credit, the better. It establishes a pattern of good
financial management that lenders are looking for.
The use of your credit. If you
max out your credit cards and are close to the limits on most of
your loans, you will be viewed as risky. It is best to have moderate
levels of credit with low balances or no balances on them.
Mixture of credit types. Lenders want
to see that you can handle debt. Someone with a combination of
revolving and installment debt is less risky than someone with only
one credit card and nothing else.
The higher your credit score, the
less of a risk you are to the lender. A good credit score will help
you qualify for a good mortgage with favorable terms. A poor score
means you will pay higher interest rates and have stricter
terms.
Know your credit report
Why should you bother checking your
credit report if the lender is going to check it too?
Four out of five credit reports
contain errors. There's a pretty good chance that your credit report
has a mistake that is negatively affecting your credit and credit
scores. You will want to fix these errors before applying for a
mortgage.
You can obtain free copies of your
credit report from each of the three credit reporting agencies,
Equifax, Experian and Trans Union. Each report will have small
differences and different credit score scales.
Look over the reports for any errors.
If you find a mistake, don't waste any time getting them fixed. If
you see late payments and credit balances that are correct, go ahead
and prepare an explanation for them. The lender will ask you to
explain them. Go through the account numbers to make sure that they
are correct.
If there are any outstanding bills
that you didn't know about, go ahead and get them resolved. This
sometimes happens when you move and the last bill for a utility
isn't forwarded to your new address.
To keep your credit report in the
upper numbers you simply need to pay all of your bills on time,
every time. Take the time to learn more about your credit score and
how you can improve it. A higher score saves you money by getting
you lower interest rates and insurance premiums.
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