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5 Facts about your Credit Score and getting a Mortgage
A Lending Hand - Good Credit Need Only Apply!
5 Facts about your Credit Score and getting a Mortgage
Are you thinking of buying a new house? If you're like most people, you'll probably have to secure a bank loan or a mortgage. When it comes to money lending, most mortgage lenders strive to live by maxim of 'only good credit need apply.' Yes, there are lending institutions and mortgage brokers that will lend to individuals or businesses with very low credit scores (known as 'bad credit mortgages'), but these loans often come at a high price. These types of mortgages frequently come with very high interest rates and exorbitant fees that can end up costing consumers much more than the original purchase price. Even if your credit score is not necessarily bad, but just 'so-so', chances are you'll end up paying a lot more than a person with very good credit.
So what exactly do mortgage lending institutions consider good credit? Good credit is based on your credit report and the accompanying three-digit FICO credit score.
Your FICO credit score is based on a number of factors, including:
- Your payment history. This includes whether you have missed any payments, or paid late. Payment history also involves the different types of payments (car, mortgage, different credit cards, etc…) you make each month. Roughly 35% of your credit score is determined by your payment history. A person with good credit probably has a consistent record of paying on time each month over a long period of time, with little or no missed payments.
- The amount you owe on all your different accounts. Do you have dozens of accounts carrying high balances? Are most of your credit card accounts maxed out? Or can most of your debt be traced to one or two accounts, such as your mortgage and car payments? Good credit is hard to attain if you carry balances on many different accounts. A person with good credit probably only carries balances on one or two accounts.
- The length of your credit history. This refers to whether you have established sufficient history to provide an accurate portrait of how you manage your finances. Mortgage lenders want to know whether you have a history of paying on time. Keep in mind that even if you have managed your credit perfectly, if your account is only a year old, it probably won't raise your credit score immediately. Keep it up for a few years, however, and watch your credit score increase.
- Types of credit. Another factor used in calculating your credit score involves the types of credit you use. Different kinds of credit include credit cards, mortgages, and installment loans such as car and student loan payments. If the type of credit you most commonly use weighs heavily on credit cards and other high-interest credit sources, your credit score will probably suffer.
- New or recent credit history. The last factor used to calculate your credit score has to do with your recent credit history. This includes any new credit accounts you may have opened, whether you've made requests for new credit, and how you've recently managed all of your credit. If you decide to open several new accounts at once, be warned that this may hurt your credit score. A person with good credit most likely does not open new accounts frequently, but rather has a long history with a few accounts that are in good standing.
Now that you know what good credit looks like, you can improve your chances of getting a mortgage if your credit is less than stellar? First, obtain a copy of your credit report. Your report is available from any of the three major credit reporting bureaus-Experian, Equifax, and TransUnion. By law, you can obtain a free copy of your credit report once a year, but additional copies will cost you about $15. Review your credit report carefully and contact the credit bureau if you spot any errors or omissions (be prepared to provide documentation).
Remember that so much of your credit score depends on your payment history. The importance of paying your bills on time, every month, cannot be stressed enough. Many mortgage lenders offer you the option of scheduling automatic payments each month. Make use of these, if your financial situation allows. Also, don't open new credit accounts if you don't intend to use them, and don't open and close accounts frequently. Instead, focus on using responsibly the accounts you already have. This alone will raise your credit score, and make you much more likely to get the best mortgage from lending institutions.
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