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The Impact of Your Credit When Buying a Home
By Ray Zimmerman
Many individuals do not realize the importance of their past credit history when they are wanting to purchase a home. When you have good credit, lenders are generally confident that you will make your monthly mortgage payments on time. Having good credit means that it will be easy for you to secure a home loan with a good interest rate when you need one. The term "Good Credit" can be defined as follows… • You pay all of your bills on time. • You're not financially overextended. • You're not placing yourself at risk for financial problems. • Your credit history shows that you are a financially responsible individual. Credit problems will make it more difficult to get a home loan with low interest rates. Unfortunately, its impossible to make your credit problems disappear overnight. The majority of lenders for all types of personal loans, mortgage loans, car loans, and credit cards report your payment habits each month to the credit bureaus. Late payments that were made several years ago can affect your current credit. Lenders always evaluate the credit risk of an individual when they apply for a home loan. The lender will try to determine the likelihood that all monthly mortgage payments will be made on time and that the loan will be paid for as agreed upon. When judging credit risk, lenders will review the following information of the applicant. Job and Income All regular income from earnings, commissions, investments, rental payments, and income from all other sources. Lenders look for a stable work history and a steady monthly income. The majority of banks check to see if the borrower has been on their job for at least two years. Personal Assets Cash in checking and savings accounts, credit unions, cash values of insurance policies, retirement funds, investments, and other valuables that can be easily and quickly converted into cash. Personal Liabilities Mortgage and home equity loans, car loans, credit card balances, student loans, outstanding medical bills, and all other consumer debt. All Other Pertinent Financial Information Anything that could affect timely mortgage payments such as a recent bankruptcy or property foreclosure, all collection activity including judgments and charge-offs, any pending lawsuits, current obligations to pay child support or alimony, or if a co-signer on any loans. Debt-to-Income Ratio Lenders convert all monthly debt and income into a debt-to-income ratio by dividing the borrower's total amount of debt by the total amount of their gross income. Generally speaking, most lenders use 36% to 42% as their maximum allowable debt-to-income ratios. Although there is no set standard in the industry, lenders will not exceed the ratios that they have adopted as a company guideline when extending credit for a home loan. Credit Bureau Reports There are three national credit bureaus that collect information and provide reports to lenders and other creditors for a set fee. These credit bureau reports include details on your credit accounts, as well as, your previous and current payment history. Past Payment History Late payments on all of your accounts can affect your loan request. Making timely mortgage or rental payments is extremely important. Just one or two late payments of 30 days or more can greatly affect your loan approval and the amount of the interest rate of the loan, if approved. After reviewing the above information, you can now see why individuals with plenty of income and a history of paying all of their bills on time may have trouble securing a mortgage loan if they have a lot of current debt. At the same time, individuals that have little debt and a good income could have a problem getting a loan approved if they have had several late payments or they have not yet established a credit history. Your credit history will follow you where ever you go during your entire lifetime. If you have established a bad credit history, chances are you will not be able to buy a home or little else on credit. If you need to repair your credit because of past credit problems, you may need to consult a credit repair company to help you. |
Equifax
| Experian
| TransUnion
| Free Annual Credit Reports
| Top 10 Credit Repair Companies
The Three Credit Reporting Bureaus
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This intel was contributed by crawfish
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