The importance of good credit is an important consideration in securing a mortgage for the purchase of a home. Banks and credit card companies decide whether to lend you money and what interest rates you will pay based on your credit score. Be prepared to examine your past credit performance and, if necessary, make changes to your money habits. Your credit score is a number that helps a lender predict how likely an individual is to repay a loan, or make credit payments on time.
The most common credit scoring system is FICO (Fair, Isaac, & Co.) scoring which has a scoring range of from 300 – 850. The higher your FICO score, the more likely a creditor will extend credit and the most advantageous (lower) will be the interest rates available to you. Lower scores, likewise, will yield the opposite results. Improving your FICO score will go a long way in increasing your chances of securing a mortgage loan at the most beneficial interest rate. Scoring factors include the following:
• Payment History (35%) – Tracks your history of payments with various creditors/lenders, length of time that has passed since the most recent negative credit item, severe unpaid debts, public records, and severity and quantity of delinquent payment accounts.
• Outstanding Debts (30%) – Takes into account quantity of credit accounts, ratio of credit balances to credit limit, the amount owed on all accounts, how much is owed on each type of account, and how much is paid off.
• Length of Credit History (15%) – Looks at your overall length of credit history, how long have specific accounts been established, and how long it has been since you used certain accounts.
• New Credit (10%) – Reviews how many new accounts particularly credit card accounts you open, how long has it been since you opened a new account, how many recent request for new credit inquiries have you made.
• Types of Credit Used (10%) – Do you have a “healthy” mix of installment and revolving accounts? Avoid finance company and unsecured credit cards. Use national cards
Get pre-approved to get the mortgage
Apply to several lenders within a 30-day period so that the inquiries do not damage your credit score. You may want to do this before contacting a realtor so that you have a firm idea of how much of a house you can afford and avoid purchasing a house beyond your means. In addition:
• Sellers love buyers who get pre-approved. It gives them the comfort feeling that they may accept your offer without much difficulty in ultimately closing the deal since you have already been checked out by a lender.
• Avoid getting prequalified as opposed to getting pre-approved. Pre-qualification is simply an estimate by the lender of how much you can afford to borrow without verifying your financial information. Pre-approval, which is much strongerthan pre-qualification, means that the lender is usually prepared to give you a loan pending verificationn of your financial information.