Your mortgage loan approval relies heavily on 3 qualifying factors, Income, Assets & Credit. All 3 are critical but none more than your credit profile as it will determine the programs at your disposal and greatly impact the terms that you receive, such as the interest rate.
Why is credit so important?
When you apply for a mortgage to purchase or refinance a home, lenders need to determine your credit worthiness. They look at your credit score, most often the FICO Score, which helps them predict, based partly on your past behavior, how likely you are to repay the mortgage. Lenders use this score to help determine what type of mortgage you’re eligible for and whether or not to approve your loan.
Below is a chart that outlines what factors impact your credit score and descriptions on each category.
Payment History – 35%
Sound payment history is critical to a string FICO score, be conscious of your due dates to ensure all payments are made on time
Amounts Owed – 30%
This factor is extremely important and second only to timely payments. Careful attention should be paid to your revolving accounts especially. The balance which you carry vs. the available limit (known as balance to limit ratio) heavily impacts your score and is often the best way to enhance your credit. To witness improvements make sure that your balances are at, or below 30% of the available limit at ALL times. Doing so will reflect responsible utilization of the credit extended to you and favorably impact the score that is rendered.
Length of Credit History – 15%
Although no person can go back in time it is important to understand that the longer you have had the credit the more impact it will have on your score. That said, establishing credit at a young age is key to creating what we refer to as credit depth, often lenders require a certain number of accounts that have 12 months or more worth of history.
Credit Mix – 10%
Diversity matters! There are three different types of accounts in the eyes of the credit bureaus;
- Revolving – Credit Cards & Department Store Cards
- Installment – Personal, Auto and Student Loans
Having different types of accounts, in good standing, helps to add depth to your profile and can further enhance your scores.
New Credit – 10%
This category works in conjunction with the length of your credit history but focuses more on new inquires. When a consumer applies for credit it results in a hard inquiry and can reduce your FICO score. Be conscious of who pulls your credit and how frequently it is done, ideally a consumer limits their new inquires to 6 or less per year.
NOTE: If a consumer has their credit pulled multiple times for the same type of credit (i.e. mortgage related) within a 30 day period, it has no impact on your score. This is meant to encourage consumer to shop for financing without damaging their credit.
Questions on YOUR Credit?
When financing real estate choosing the right professionals to assist you in this journey will be the key to YOUR success, I have been blessed in my career to surround myself with whom I consider the very best at their profession and welcome you to contact me and my team to help Guide You Home.
Content submitted by;
Sr. Mortgage Advisor, NMLS #397424
Province Mortgage Associates, Inc., NMLS #2861
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