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Managing
Your Credit Wisely Improves Your Chances
of a Good Mortgage
Whether you're a first-time
buyer or a seasoned homeowner looking
to move up to a bigger or better house,
how you have managed your consumer
credit rating can have a real impact
on both the amount and terms of your
next mortgage.
Naturally, if you have kept your credit
use reasonable and always paid your
bills on time, you will most likely
have very few difficulties obtaining
a mortgage loan. But what if you are
one of the many Americans whose credit
report is less than perfect?
Contrary to popular belief, it is
not impossible to obtain a mortgage
with an imperfect credit rating. After
all, mortgage lenders are in the business
of providing loans, and have it in
their interest as well as yours to
find an appropriate way to finance
your home purchase.
Credit Doesn't Necessarily
Have to Be "Perfect" to Be Good
In the case of a single bad mark on
an otherwise good credit history,
many mortgage lenders will simply
ask for a written explanation of the
late payment. If the explanation is
reasonable and believable, many lenders
will overlook the isolated problem - especially
if it occurred some time ago and your
credit has been good since.
Indeed, as far as lenders are concerned,
the most important time period in
your credit history is just the preceding
year or two.
According to guidelines established
by the Federal National Mortgage Association
(Fannie Mae), indicators of good credit
do include some leeway for occasional
late payments. Thus lenders will look
at:
- Revolving credit (e.g., credit
cards), which should show no payments
60 days or more late and no more
than two payments 30 days late;
- Installment credit (e.g., an
auto loan), which should show
no payments 60 days or more late
and no more than one payment 30
days late;
- Housing payments (e.g., mortgage
or rent), which should - not
surprisingly - show no late
payments (this can be proven by
the payment history from a mortgage
lender or by the borrower's
canceled checks for the past 12
months).
Credit Scoring Broadens Scope
of Lenders' Considerations
As credit scoring in mortgage loan
decisions has become more sophisticated,
lenders have also begun looking at
other factors in your credit history
as well. They might be concerned if
your credit cards are "maxed
out" (indicating possible future
difficulties in managing debt and
making payments) or, conversely, if
you have large lines of credit available
(that you could at some future time
run up into unmanageable debt).
Some lenders will also look at how
many inquiries have been made into
your credit report recently, interpreting
a large number of inquiries as a sign
that you have applied for a large
amount of credit lately. Applying
for numerous lines of credit might
indicate that you have been turned
down by several other lenders or that
you are in the process of accumulating
new credit accounts which might leave
you with too much credit available
to be a good credit risk.
"Compensating Factors" Can
Make a Difference
Credit scoring can also work to your
benefit, helping to overcome potential
problems like a high debt-to-income
ratio or a slightly imperfect credit
past. Scoring also considers "compensating
factors" that Fannie Mae guidelines
indicate might justify some degree
of risk to the lender. These compensating
factors include:
- A large down payment;
- An energy-efficient property
(e.g., with up-to-date heating
and power systems);
- Previous large housing payments
(such as high rent), which show
the borrower's ability to channel
a larger-than-normal proportion
of income to payments;
- A history of good credit and
the potential to accumulate
savings in the future (despite
a current low net worth);
- The likelihood of career advancement
and earnings increases due to
strong education or job training
(this is particularly helpful
to young borrowers who carry
student loan debt);
- A substantial net worth (despite
current low earnings).
Knowing about these compensating
factors - and which of them are
at play in your own situation - can
help you to get the loan you need
for the home you really want. But
you also need to know what your credit
history looks like on paper to be
able to optimize your borrowing ability.
For example, you may have cut up a
credit card years ago, but never bothered
to actually close the account. This
account shows up on your credit report
as available credit, which lenders
may think adds to your risk. The time
to close this unused and unnecessary
account is before you apply for a
mortgage.
In addition, you will want to be confident
that the information in your credit
report is accurate. Inaccuracies in
your credit report - or, worse,
the damage done by credit or identity
fraud - can seriously impact mortgage
lenders' likelihood of offering
you a loan.
Reviewing Your Credit Report
Puts You In Control
Many financial planning experts recommend
checking your credit report on a regular
basis in order to keep tabs on the
information placed on it. Routine
checking on your part allows you to
stay on top of what credit grantors - including
mortgage lenders - will read about
you when they check your credit history,
and enables you to correct any inaccuracies
and catch fraud before these problems
impact your mortgage loan. Disputing
inaccuracies can take up to 30 days
to resolve, so taking care of them
well in advance of applying for a
mortgage is also important.
The information provided by your credit
report can be invaluable in understanding
your credit rating as mortgage lenders
see it, enabling you to correct inaccuracies
and know best how to present your
correct credit history and circumstances
in order to get the mortgage you seek. |
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