Your Credit, Your Finances, and Your Mortgage

Your credit and your current financial situation are the main factors in deciding whether you qualify for the mortgage you want. And it goes a lot deeper than a simple credit score.


This page:

  • Explains how and why mortgage lenders assess your credit

  • Describes other important financial factors that affect approval

  • Shows you how to make the best of your credit situation

On this page we'll examine how your credit history affects your mortgage approval. On the next two pages we'll take a look at your credit capacity and how lenders will look at the mortgage collateral.

The second part of this guide examines the rest of the decisions you'll have to make when choosing your mortgage. Refer to the table of contents if you're looking for specific information.

Your credit history and profile

This may be the single most important factor in determining whether or not you qualify for the mortgage you want. Mortgage lenders always look at your credit score (and often your credit report too) when evaluating an application.

Briefly, your credit report is a record of information on all of your credit accounts and how you've managed them. Your credit score is a number calculated to reflect this history and, more importantly, to predict how responsibly you'll treat credit obligations in the future.

Every lender takes your credit reputation very seriously. Poor scores are very difficult to offset, while excellent credit can earn you a low rate mortgage with little or no documentation.

And you should never ever apply for any major line of credit, especially a home mortgage, without researching your credit history first. Mistakes are very common on credit reports and they can take time to clear up. (For more help with credit repair and information, read our pre-mortgage guide.)

If your credit history is less-than-stellar, but you want to buy soon, you can probably still get a mortgage now with a higher interest rate. Some lenders who specialize in such subprime mortgages even have special credit-building loans, during which the interest rate decreases with good payment behavior.

If this is you, Fullspectrum has a line of mortgage products that fit the bill. But, for now, let's focus on some other aspects of your financial profile that come into play.

Your employment situation

Your record of employment is often scrutinized heavily, especially when other aspects of your profile don't look very good to the lender.

Lenders like to see a steady employment record. Ideally, you have logged many years with the same employer, though a recent change is fine if you've stayed in the same general field.

If you've been steadily employed in the past, but left work to attend school or care for children and have recently returned to the job lenders won't generally penalize you for the absence.

However, having had many different employers or fields of work can suggest to a lender that you have trouble committing to one job and that your future flow of income might be disrupted.

And, unfortunately, mortgage lenders are also very wary of the self-employed. Some require proof of a certain period of financial success in the business, because, sadly, most businesses fail within the first two years. And even with two years under your belt, you may have to settle for a subprime interest rate. Home buyers whose income is derived mainly from commissions may face similar obstacles.

Proving independent income, even with an established business, can be difficult and many self-employed consumers opt for a low-documentation loan. The interest rates on such loans are usually higher than normal, but the hassle and worry of verifying all kinds of financial information is dispensed with.

Low-documentation mortgages are also a great option for anyone with a "checkered" employment history or who is unable to easily verify earnings or savings. If your credit profile is superb, lenders may not even charge a higher interest rate on a low-documentation loan.

Your education

An applicant's educational background may become a factor with mortgage lenders, particularly when other "credit profile" factors prove unsatisfactory or inadequate.

For example, for a recent college grad with little established credit, having a diploma can mean the difference between approval and rejection. That's because lenders like to look at a young borrower's future earning potential when figuring credit capacity.

However, your educational background is only taken into account as a last resort. Most of the time it won't make any difference at all. And since it's a positively-contributing factor the lack of a degree does not hurt your chances for approval - the presence of one just helps it.

Of course, while your potential as a borrower is important to any lender, banks are also eager to see that you have a good credit capacity. It's important to borrow responsibly.



Next: Credit capacity: How much house can you afford?

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