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How Your Credit Affects Your Mortgage
Your credit record is one of the major factors banks and other lending institutions look at when determining whether or not to accept your mortgage application. It also affects what sort of mortgage you are able to receive, including the interest rate, length, and the borrower favorability of other terms.
Lenders will generally offer a mortgage with a higher interest rate to someone with a relatively poor credit score (if his or her loan application is not rejected) and a pre-payment penalty may be part of its terms. Banks are also more likely to expect a substantial down payment in this situation, because they consider loaning money to people with undesirable credit records to be a greater financial risk. The more recently negative information has appeared on your credit record, the more it affects your score. A better credit score can have a massive impact on your overall mortgage cost, reducing it by thousands of dollars, and also makes a wider range of mortgage types available to the borrower.
The FICO score is the most common type of credit score used by American businesses, but other scores also exist. Based on calculations provided by the "Loan Savings Calculator" feature on the myFICO web site, a 15-year mortgage for $215,000 dollars would have a total cost of about $35.5 thousand less for someone with a FICO score of 700 to 719, as compared to a person with a score ranging from 620 to 674. This reveals that an overdue payment financially affects you much more than its late fee, if you intend to apply for a mortgage. MyFICO also indicates that people with scores which are less than 620 typically get disqualified for fixed rate loans which are non-conforming (jumbo) or have fifteen year terms.
Maintaining a good credit record is not only important before you obtain a mortgage, but afterward as well. A poor credit record can make it more difficult to refinance the mortgage, obtain a home equity loan, or initiate another mortgage in the future. It also impacts other types of loans and financial transactions, including employment. Keep in mind that your credit report may contain inaccuracies, which can be revealed by requesting such reports from the credit reporting agencies. It is better to determine if such errors exist and request that they be corrected beforehand, rather than applying for a mortgage or home equity loan to see if the report affects it; this will save time and prevent you from having to pay loan application fees twice.
While your credit score affects your mortgage quite significantly, it is not the only factor, which has an impact on it. Banks and other lenders also take into consideration your level of income, debts that need to be repaid, and other financial characteristics. For example, if you have a somewhat bad credit score because you had difficulty paying bills in the past, but recently paid off your student loan debt and now have a job paying $75,000 per year, banks are likely to respond more favorably. In other words, you will probably be able to obtain a better mortgage if you are willing to wait until your financial situation has improved and negative data on your record has become older.
Basically, having a poor credit record affects the overall cost of your mortgage and makes it more difficult to obtain, while a good credit history will be to your benefit. Paying bills on time, preventing bankruptcy, and avoiding debt to begin with are three important ways to maintain a positive record.
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