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How Does Credit Score Affect My Mortgage?

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Credit Score Mortgage Eligibility: The Facts

Your credit score plays a major role in your eligibility to get a mortgage loan. This is because lenders need to ensure that their investment is actually going to be regained plus profit. When thinking of buying home, one of the things most people want to find out is what kind of a mortgage rate can they qualify for in order to identify the kind of home they could afford.

Having a great credit rating always helps! In fact, before the recent financial crisis people with good credit scores could actually get a mortgage with a very little down payment. This just goes to show you how highly people with good credit scores are perceived. Using your credit report, the lender is able to make an informed decision in terms of prequalifying your loan. The first thing you therefore need to do in order to qualify for a mortgage is build your credit score.

How to Build a Great Credit Score

Having realized that the credit score is one of the determining factors on whether or not you qualify for the mortgage you need your first step should be building a near perfect score.

Here’s how you do it:

  • Analyze your current score
  • Pay your bills on time
  • Pay off debts
  • Reduce the number of credit cards you have
  • Keep your credit card accounts

To begin with, you need to find the root of the problem. First analyze your credit report for errors and dispute any that may arise to proper authority. In case there are no errors, begin by changing up some things such as late payment of bills. Always ensure that your credit card bills are paid and on time.

If you often forget to do this, set up reminders or alternatively put in place an automatic bill payment system with the help of your bank. Always keep an eye on these payments to ensure that they do not exceed the bill amounts. It is important to note that your payment track record accounts for 35% of the score: there are no shortcuts for this. Clear your debts or reduce the amount significantly.

Credit usage accounts for 30% of the score which again is a huge percentage. It is therefore recommended that you maintain credit card usage at 10-20%. If you think of it, you really don’t need many credit cards: these only work to tempt you consequently in getting you deeper in debt. The more credit cards you have the lower your score. Even while trying to get rid of the number of credit cards you have, you must not close your accounts.

Closing an account after only having it for a few months can lower your score. This is because as mentioned earlier your history plays a major role. It can also hurt you by increasing your debt ratio. While you will not improve your credit score over night, it helps to begin cleaning up your act as soon as possible, if you intend to benefit from credit score mortgage eligibility.

Credit Score Loan Eligibility Criteria

When looking to qualify for a mortgage, here are some of the things a lender will be interested in to determine your eligibility:

  • What is the borrower’s credit score?
  • What is the borrower’s credit history?
  • What is the state of the credit cards?
  • Are there any excessive payments?

The recommended mortgage eligibility credit score is usually from 500. In fact a score of 500 to 520 is the lowest most lenders will go: anything lower than this could disqualify you for a mortgage. People with credit scores that range between 760 and 850 are considered top tier and can get drastic reductions on their interest rates and more variety when it comes to loan choices.

Though it is impossible to have a perfect credit score of 850, it does help to be in the top tier category. Your credit history not only contributes to your credit score but also towards the lender’s decision. The lender will want to know if you are bankrupt and information such as your payment history or whether you have had any collections.

This information gives a lender an indication on what you are all about when it comes to paying off debts. The state of your credit cards is also highly looked into: maxed out cards are a major drawback as this shows your level of financial responsibility.

The lender will also look at whether you have excessive monthly expenses and seek to get explanations for those since this could affect your debt to income ratio. Having a good mix of credit shows that you have it together since you can handle your money as opposed to having spending habits that are unexplainable.

Loan Eligibility with a Poor Credit Score

So what happens to people with poor credit scores, can they get mortgages? The answer to this popular question is yes.

Here’s how:

  • Expect higher interest rates
  • Show proof of steady income
  • Do away with other debts
  • Have a substantial amount for down payment
  • Look for someone to co-sign

Just because you have a bad credit report does not mean that you should not benefit from a mortgage. However this comes at a price and you will first need to make certain that the report is indeed accurate. One of the areas that will sting for having a bad credit report is in the interest department.

You are a risk to the lending institution and they will ensure that they protect themselves by giving you a high interest rate. Alternatively, you may only be able to qualify for variable loans which as we all know are high risk due to the changing interest rates. You must also be prepared to proof that you can pay for the loan by having a steady income.

This is one of the major aspects the bank will look out for. Your other debts need to be dealt with as well. Showing your lender that you have no outstanding debts will increase your chances of getting a loan. Put as much as you can into your down payment. This just goes to show that you are making a serious contribution toward your investment and therefore will not risk losing it.

If you can find someone with a good credit rating, this will really be of help to you. The co-signer is usually held responsible should you fail to keep your end of the bargain. Other small steps you can take are giving explanations on the reasons for some of the negative aspects of your poor rating. You may also want to consider government programs such as VA, which is the Veterans Association and the FHA or Federal Housing Administration.

What Your Credit Score Means

As mentioned earlier, borrowers with top tier scores of between 760 and 850 tend to get the best mortgage deals. However what do these numbers means and what can they do for you when you want your mortgage? The best way to address this question is to first deal with what a credit score really is.

Your credit score is a calculation that is based your credit history to determine how credit worthy you are. The reason why this is so important to your lender is because this is the only way your lender can figure out whether their money is safe with you.

In the US there are various bureaus that report credit, the three main ones being Equifax, Experian and TransUnion. The most important credit score is FICO also known as Fair Isaac Corporation’s consumer. This is what lenders rely on to determine if loaning you money is really a smart move on their part. If you have a credit score that lies anywhere between 620 and 760, mortgage lenders will deem you credit worthy and consider you their standard loan options.

Though this is not a bad credit score, you should not expect any special packages or deals to come your way. Credit scores that fall lower than 620 are in a category known as subprime and your credit score mortgage eligibility will grant you a subprime loans. Subprime mortgages were quite easy to come by a few years ago but after the banking crisis things have changed drastically.

Your best bet is to have a credit score of more than 620. A FICO credit score of 500 is bad to put it lightly. Lenders will frown upon you and some will not even give you the time of day, you should be prepared to part with at least 50% of the purchase value if you are looking to get a mortgage with such a credit score. As you can see, lenders are very cautious and need to safe guard their interests if they are to remain in business.

Lending Criteria

There are two basic criteria’s lenders use to establish how much the borrower will get. The first criteria involve comparing the housing costs to that of the borrower’s income. With these criteria, the borrower will give information on his or her earnings before deductions. That is the gross income. Using this information, lenders generate a percentage that will guide them on what amount the borrower could qualify for.

The second criteria involve calculating the debt to income ratio. The borrower gives information on all recurring expenses. These could be anything from car loans to school fees and credit card payments. The lender then embarks on creating a percentage based on this information to determine what sort of mortgage is best for this particular borrower. As you can see mortgage formula is not standard, because people have different incomes, expenses and credit scores.

Loan Eligibility Credit Score plus Collateral

In addition to having a good credit score, a lender may also put into consideration collateral. Collateral is requested when the loan amount is more than what the property is worth. Most of the times, lenders will refuse to grant such a loan and will only consider it if the borrower has collateral.

Such a situation is sometimes negotiated by a real estate agent who is an expert in such matters and therefore has a better chance of getting a good deal. The reason why such a loan is very difficult to get is because the borrower could decide to move out of the property. Since this loan amount is greater than the value of the property, it calls for more caution in the part of the lender.

Your credit score mortgage eligibility is therefore not something that can be easily dismissed. Not only does it determines your credit value but also gives the lender some insight into what sort of a borrower you are.

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