One key component in your mortgage application is your credit rating. Credit Scores are a 3 digit number ranging from 300-900, 300 being poor and 900 perfect – and almost impossible to attain. Creditors will report your loans, lines of credit, credit cards, car loans, student loans and mortgage loan details to the credit bureaus (Equifax anortgaged Trans Union ). Your score is used by the lenders to help determine credit risk and how likely you are to pay back your mortgage as agreed.
When it comes to applying for a mortgage a higher credit score can result in better rates and terms, more options and higher approval amounts! So let’s talk about the major factors that will affect your credit score:
- History
Your credit bureau includes the history of any loans or liabilities in your name or that you may have co-signed for. It tells us how long you have had each liability, and ideally we like to see a minimum of 2 years reporting on the credit bureau of two trade lines / loans so show sufficient history.
Your payment history is also reported to the credit bureau. If you’ve missed payment on a loan this will appear, along with how many payments you may have missed and how late the payment was. Late payments will have a negative impact on your credit score.
When a financial institution does a credit check at the time of a credit application this is called an inquiry. Any past credit inquiries report to the credit bureau and the bureau will show us who pulled your credit and when. Too many inquiries in a short period of time can also start to bring your credit score down as it can appear as though you are credit seeking and possibly in financial trouble.
- Usage
Another factor in determining your credit score is your credit usage. You do need to use credit to build a great credit rating, but must use it responsibly. When it comes to credit card and other revolving debts you will want to ensure that you have credit available and are not overextended. Paying credit cards off monthly and / or keeping those balances well below the limits will increase your score and show the lenders you can manage credit wisely. On the flip side, if you max out or go over your limit on your credit cards or credit lines you can expect your credit score to suffer as a result.
- Public Records
Public records include things like collections, bankruptcies, judgements and liens. These can all have a longer term impact on your credit rating and it can take time to rebuild that positive credit history. For example, a $50 collection from your internet provider for forgetting to return your cable box is a common one I see, and once paid back should have minimal affect on your rating. However, a Bankruptcy in the tens of thousands of dollars will of course have a much longer lasting effect on your credit worthiness and ability to secure a mortgage. It can take years to reestablish your credit in this case.
If you will be shopping for a mortgage in the near future I recommend a credit review. Give me a call and we can review your report together and address any potential issues now to ensure you can get the best mortgage possible when you purchase, refinance or renew your mortgage.