Managing
your credit wisely improves your chances for 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.
Your 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 later and no more than
two payments 30 days late.
-
Installment credit (e.g., an auto loan), which
should show no payments 60 days or later 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 dispute 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. ConsumerInfo.com makes it easy for you to
order a copy of your credit report online, compiled by
one of the three national credit-reporting agencies. In
addition, another very effective way to see all of the
information that mortgage lenders will be looking at
when considering your application, is to order a triple
merged 3 Bureau Online Credit Report, which shows and
explains the information on your credit report as
compiled by all three of the national credit bureaus,
Equifax,
Experian and
TransUnion.
The information provided by your credit report can be invaluable in
understanding your credit rating as mortgage lenders see
it, enabling you to dispute inaccuracies and know best
how to present your correct credit history and
circumstances in order to get the mortgage you seek.
Mortgage Glossary10
