Creditworthiness - A mortgage lender considers your creditworthiness when deciding whether to approve your for a mortgage loan and how much of an interest rate you will pay for that loan. Your creditworthiness has three main parts, your credit history, your income and the loan-to-value ratio of the property.
Your Credit history plays an important role in determining your creditworthiness. Having certain types of debt are good for your credit ratings along with how long you have that debt. Your credit history consists of all the inquiries made by creditors when you applied for a certain type of credit. The most popular forms of credit/debt on your report will be Installment debt, Revolving debt and Mortgage Debt.
The main item that lenders look at now-a-days with so much of mortgage lending being so automated is your credit score, also referred to as your fico score. Your payment history, credit usage and everything else in your credit profile will determine what your credit score is. Keep in mind though that lenders don't only look at just your credit score they do look at your entire loan application and documentation as a whole. Just because you have a high credit score does not guarantee that you will be approved for the mortgage you desire and just because you have a low credit score does not mean that you will be declined for the mortgage that you want. For example if you are looking to buy a home with little to no down payment and you have a 600 credit score but you have 300,000 of assets put away somewhere you are more apt to get approved for a mortgage with a better rate than someone with a 640 score and no assets put away.
How Does Credit Debt Affect My Score? - The debt you currently owe impacts your total credit score by about 30%. Only “Payment History” is a bigger factor affecting about 35% of your credit score. Meaning, even if you make your payments on time every month without fail, an overloaded credit profile can hold your credit down, keeping you from the savings and advantages that premium credit holders are given.
To keep this portion of your score in check, consider the following areas of debt that may be bogging your credit score down:
-Amounts owed on all accounts, including the various types of accounts. Meaning that on top of the overall balances you have, the score also considers the amounts that you owe on certain types of accounts, such as revolving or credit card debt and installment loans.
-How many accounts currently have balances. To your credit, the more accounts with balances the higher the risk of over-extension.
-The proportion of balances in relation to the credit limits on revolving credit card type accounts. Again, showing a higher risk of over-extension, indicating someone who could have trouble making payments in the future.
-Balances on installment type accounts such as auto or boat loans are of course considered as well.
The bottom line is that being able to pay down you’re your balances on any debt is a pretty good sign that you are capable of managing your debt responsibly, which, as we covered earlier, is one of the larger indicators of good credit risk.
If you’re currently unable to pay down your debt significantly, consider the savings and credit benefits of a debt consolidation type loan. Talk to your broker, or visit us at Wisconsin Mortgage Broker with any questions.
Credit debt can be referred to as revolving debt on your credit report. Although overextending your credit line negatively impacts you, make sure you still use the card so activity is reported to the Credit Bureaus and maintains your accounts as active tradelines.
Credit debt can have a positive affect and negative affect on your score. The trick is to find the right balance of accounts and balance ratios to increase your score.
Avoid flipping credit card balances from one creditor to another prior to applying for a mortgage loan. Many times, the debt will appear with both the current creditor and former creditor. This will give the appearance of more debt than what is actually owed. Review your credit with your mortgage professional.
How Does Credit Score Affect Mortgage Rates - If you are applying for a home mortgage keep in mind that your credit score will more then likely affect your mortgage interest rate. Each of the three major credit bureaus, Equifax, Experian and TransUnion, collects data from your current and past creditors about your history of borrowing and paying back credit. If you have a poor payment history you credit score will be reduced and your mortgage interest rate will be higher. If you have a good payment history and have a higher credit score you can expect your mortgage interest rate to be lower.
Although your credit scores have major impact on your rates, there are some portfolio lenders that care more about the ratio of your loan amount to the value of your home. If you can lower that ratio, the lender may be more forgiving on your credit score.
If your credit score is below 500, or you have an open foreclosure, you can expect mortgage rates in the double digits due to the severe risk assumed by the lender. You should also expect to borrow a substantially lower percentage of the value of your home, so that means either a lot (40% or more) of equity in your home in a refinance or a 35% to 40% downpayment if you are attempting to purchase a home.
Your credit scores are a big factor when it comes to which lenders will accept your application for a loan and which lenders will turn you down. The higher your score the more lenders you will have at your picking with a variety of programs to choose from.
Your Credit Score usually is one factor in determining your mortgage rate. Lenders will often start with a base rate for the borrowers with higher credit scores then raise rates as credit scores decline.
It's virtually impossible to change your score in the time between when most people decide to buy a home or refinance their mortgage and when they apply. The higher your score, the less of a risk the investor takes.
In most cases, if the loan applicants have very high scores, such as over 720, and with no negative entries in the credit report, banks would approve the applications without requiring income and asset documentations such as W2's, paystubs, and bank account statements, while still offering the low interest rates of full documentation loans.
FHA and VA loans generally do not punish people with lower credit scores, as long as the overall credit meets their guidelines.
Having a high credit score does not guarantee that your loan will be approved by a lender, nor does it guarantee that you are going to qualify for the best rates available. There are numerous other factors involved such as what type of income documentation is required (for example stated, NINA, NIVA, No Doc, full doc, etc...), the purpose of the loan, the LTV (loan to value) of the loan, amount of reserves, any prior bankruptcies, and many, many other factors will help to determine whether you qualify for a mortgage altogether and what type of rate you will qualify for. Therefore, don't fall into the trap of thinking that you are going to get a certain rate just because your credit score is extremely high (although it does help) or you are going to get a really bad rate because your credit score is a little below where the lender prefers it to be. There are many situations when compensating factors come into play and your mortgage rate can be affected by more than just your credit score alone.