Are you ready to make the commitment to buy a house? If so, one of the next steps is to qualify for a mortgage. Your credit history is vitally important to this process. Everyone has a credit score between 300 and 900 points. Individuals with higher scores carry lower risk, which means they’re eligible to receive a wider variety of mortgage options. Your credit score is determined by several factors, including your payment history, amounts owed on both credit cards and loans (or mortgages) and the length of your credit history.
What types of credit have you had?
There are several types of credit or debts that factor into your qualification. The first type is known as a secured loan, like an auto loan or your present mortgage. These loans are aptly named as they are secured against an item of value, such as your car or home. Unsecured loans are loans which have no collateral associated with them. These are often referred to as installment loans as they have a regular set payments over a set amount of time. The second type of credit is revolving debts, examples would be credit or retail cards, and lines of credit (either secured against a property or unsecured). Revolving means the payments can fluctuate over time, depending on the monthly payment you make and the balance you carry, but usually have interest-only payment requirements. Revolving credit can have an impact on your mortgage application as a higher payment is required for qualification purposes to calculate your budget.
How you have dealt with credit in the past
How you have dealt with these loans and credit cards will affect your credit score negatively or positively. Which in turn will affect how banks and mortgage companies will look at you for the future. It will affect the amount they are prepared to loan you and the conditions, including interest rate, under which they will lend to you. The better you have handled your credit, the better terms and rates you will be offered. As a general rule, someone who struggles to pay off debts and racks up late fees and interest will have worse credit than someone who always pays off their loans on time.
What is not counted toward your credit score?
Your month-to-month bills are not necessarily counted in your credit score, however if you have a history of late or non-payments they will affect your credit report negatively. Payday loans will not appear on your credit card unless you pay them late, in which case they could impact your credit report in a negative direction. Unpaid debts, collections or judgements will negatively affect your credit score. If you have not handled your credit very well in the past, don’t be afraid to reach out to your mortgage professional who can guide you through the process and assist you in finding the right mortgage and improving your credit situation.
You need to have enough income to cover your debts, including the new mortgage. Contact The Mortgage Advisors to schedule an appointment and talk about your credit history and options when it comes to finding a mortgage solution. Our mortgage brokers can assist you in finding the right mortgage to fit your needs.