How Credit Affects The Mortgage Loan Process

How Credit Affects The Mortgage Loan Process

How CreditImpacts Home Mortgage Loans

When applying for a home loan, one wantsto make sure that your credit profile is the best it can be. Your credit profilehas a major impact on your home mortgage loan. Your creditwill affect the home loaninterest rate, your ability to qualify for the home loan, and the type of home loan program you can apply for.

Since creditplays an important role in the home mortgage loanprocess, it is important to understand the relationship between mortgage qualification and credit. It is also important to know what you can do in order to have the best possible credit profile and score before applying for a mortgage loan.

Bankruptcy and Foreclosures

Bankruptcy and foreclosuresare two of the biggest itemson a credit report that can majorly impact the mortgagedecision. On bankruptcy, depending on whether it is Chapter 7 or 13 bankruptcy, one might have to wait 2-4 years before the loanwill be approved. FHA home loans allow a homebuyer to qualify with a bankruptcy if thebankruptcy has been discharged at least two years. Clients with a bankruptcy on their credit report must also reestablished their credit with positive trade lines (new accounts) and have no new negative credit reporting to the bureaussince the bankruptcy was filed.

Foreclosures have acrucial impact on the ability to qualifyfor the home mortgageas many home mortgageprograms require a client to wait 3-5 years from the foreclosure date before the home mortgage loancan be approved. Short sales, depending on how they are reported to the credit bureaus, can be treated like a foreclosure when a mortgage company ismaking a loandecision.

Judgments and Liens

If a homebuyer has a judgment or lienon the credit report, most home loan lendersand home loan programs will require that the judgment or lienbe paid and released before the loan will be approved. Tax liens must be paid!

Credit Score

The credit score is the number the lenders will use in order to determine the ability to qualify for a home loan. It is important to have the highest possible credit score when applying for a mortgage. If you have a low credit score, you might not get approvedfor the mortgage or you might have a higher interest rate. FHA home loans require at least a 580 credit score, but many lenders will not approve a FHA home loan unless the homebuyer has a 620 credit score. Conventional home loans require a 620 score, but if your down payment is less than 20%, then you will need at least a 680 score to qualify for the loan.

What affects Credit Score and How You Can Raise Your Score

Obviously, paying all credit debts on time has an important impact onthe credit score. So if you missed a payment, then only time (usually 6-18 months) will need to pass in order for your score to rise back to the original score before the late occurred. Missing a home loanpayment when trying to refinance or purchase a new home has a huge impact on the ability to get approved. Many mortgageprograms will not approve a loan if a mortgage payment has been missed in the last 12 months.Late payments on credit cards will lower your score as well.

Credit Card balances also have a crucial impact on your score. Maxed out credit cards will decrease your score. It is a good idea to keep credit card balances around 10% of the credit card limit.This means that if you have a $1000 credit card limit, then you do not want to keep more that a $100 balance on the credit card. Paying down your revolving debt or consolidating your revolving debt into an installment loan will help increase your score. Installment loans are loans with terms that once the term is completed, the debt is paid off. You also cannot add new debt on an installment loan. On a revolving debt, you can payoff and add debt.

Once the Home Loanis Approved

Once you are approved for a home mortgage loan, it is important to know that you should not add any new debts during the home loanprocess! Adding new debts while still in the loan process could affect your ability to closeyour homeloan. So it is best to wait until the home loan has closed and funded before adding any new debt to your credit profile.

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