Jumat, 30 Januari 2009

The Impact of Credit Rating to A Mortgage Application

When somebody start to apply for a mortgage, the lender can access your credit report - a report that is compiled by information supplied by the three main credit-reporting agencies, Equifax, Experian and TransUnion. Credit rating is one of the most important numbers that you have - it affects your ability not only to get a mortgage, but a car loan, credit card, or store credit, as well the interest rate you are given. A good credit rating is so important that some financial experts even advise you to make sure you have a good credit rating before even thinking of applying for a mortgage. Your credit score is going to be somewhere between 300 and 850, based on your record of paying back loans in the past. This is known as your FICO score, after the company who analyzes the information from the three agencies, the Fair Isaac Corporation.

Your all-important credit score is based on several factors, including the length of your credit history as well as the credit you have available and the amount of credit you have used. Whereas everybody is late with a bill occasionally, a lender is also looking for a stable record of paying bills on time - too many late or missed payments can have an adverse effect. Your employment history and the number of credit cards issued to you are also important factors.

It is basically all about the risk factor - home buyers who have a history of paying back loans and paying bills on time have much less of a chance of defaulting on their mortgage loan and are therefore less of a risk. The mortgage industry has calculated that if a person has a high credit score - for example 780 - the chances of them becoming three months behind in their payments are almost 1 in 600 and statistically, a person with a low credit score of 600 has a 1 in 4 chance of becoming three months behind on payments.

Borrowers who have high credit scores - defined as being 760 or over - will generally have more choices available when it comes to qualifying for a mortgage, as well as being able to benefit from lower interest rates. If you have a score in the 600 to 700 range, you will not have any trouble getting a loan for your new home - but you may be paying back the loan at a higher interest rate.

Generally speaking, a score of around 500 is about the lowest that will qualify for a mortgage. If you fall into this category, you may have to shop around to find a lender that is willing to work with you; and your interest rate will probably be higher. Some lenders specialize in providing loans to borrowers who have poor credit - these lenders are often referred to as sub-prime lenders. One possible solution for those with a very low credit score is to consider applying for an FHA loan, which tends to use different criteria to qualify people.

A low credit score can make a big difference in the amount for which you will qualify, as well as the amount of your monthly mortgage payment. An interest rate of just one point less will mean a savings of around $5,000 on the average 15-year mortgage and even more on a typical thirty-year mortgage - around $50,000. In addition, a credit score below 630 can mean monthly payments that are between $50 and $250 higher.

There are some things you can do if you need to raise your credit score. Firstly, check your credit score and make sure it is accurate - an estimated 25% of credit reports have what might be described as serious errors on them. These mistakes can be corrected, but this can often take up to several months - not an ideal situation if you are just about to apply for a mortgage. Even a small error on your report can affect your score and the mortgage interest rate, which you are offered.

If at all possible, try not to make a major purchase such as a new car just before applying for a mortgage, as it will lower your credit score. And pay off as much debt as you possibly can - this will help to lower your debt to income ratio and raise your score. If there are some small outstanding debts on your credit report, consider taking care of them before applying. Do not let bad credit stop you from applying for a mortgage - even with a low score; it is still possible to be a homeowner. Your credit rating is very important when it comes to obtaining a mortgage and it can affect your chances of purchasing that new house. If your score is low, consider looking into ways to improve it, and you should be able to get a mortgage at a great rate.

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