Raise Your Credit Score, Lower Your Mortgage Rate
What does your credit report mean about your new mortgage? Quite a bit, actually. Your credit report is used by a lending company to figure out the program you can be qualified for as well as the interest rate for which you are eligible. This report contains a compilation of your information such as loans or credit accounts currently active, bankruptcies, late payments, judgments made against you, inquiries from potential creditors, and more. It offers insight into your financial history as well as your payment patterns.
Creditors use the credit report to decipher your credit score. As that score creeps up, your interest rate can drop. Here are a few things to do — and a few not to do — to clean up your credit report and keep it mortgage loan friendly.
Making payments on time is one of the most important things you can do for your score. Once you have a late payment reported to the credit bureaus, it can remain for years. Showing a pattern of late payments can signify to potential creditors that you are a risk when it comes to paying off your debt in a timely manner. Non-payment of debts is also reported and suggests that you are willing to let a debt lapse. This can be detrimental when applying for more credit. If you have trouble making monthly payments, contact your creditors as soon as possible to work out a payment plan that can benefit both of you and keep the issue from being reported to the credit bureaus.
Debt to Income Ratio
When applying for a loan, your debt to income ratio is a high priority number. This ratio is configured by figuring out how much of your monthly income is already going towards payment on your debts. If you are deemed to have too high of a debt to income ratio, this tells potential creditors that you may be a risk and may not have enough funding to adequately pay all of your loan payments. Since no one wants to have a potential default issue with a borrower, this can mean high interest rates or even disqualification for the loan program in question. Avoid maxing out credit cards and try to pay down existing loans prior to applying for a new loan.
If you are researching mortgage loans and are working with multiple companies for comparison of rates, try to complete all the applications in the same time period, Each time a creditor makes an inquiry into your credit report, your credit score is docked. However, if inquiries of the same type, such as those made for a mortgage loan, are made in the same 30 day period, they are lumped together and considered as one inquiry. If you draw out the process over a few months, your credit score will suffer as it will be docked points more than once.
Avoid having any other type of inquiry made on your report if you know you will soon be applying for a mortgage loan or are currently in the process of being approved for one. For instance, hold off on purchasing a new vehicle until you have closed on your new property.
Your credit report is a direct result of your credit history. If you have never utilized credit or only done so minimally, this translates to having no history, thus giving a potential creditor nothing to go off of when trying to decipher your risk factor. Make sure you have a few lines of credit and show that you can be trusted without maxing it out, and that you are vigilant in timely payments. Lack of history is no more beneficial than a low score.
So, what does your credit report mean about your new mortgage? It means you have input towards your rate as well as whether you qualify for a loan. By law, you can receive a free copy of your credit report annually, so take advantage of this and keep an eye on your score, keeping it clean for the best results on any new mortgage loan application.