How Your Credit Affects Your Mortgage

Your credit has a big impact on the kind of mortgage you qualify for. So make sure yours is in the best shape possible before you apply for your mortgage.

This page:

  • Lists factors that make up your credit profile

  • Describes what you should do months before your mortgage

  • Explains what steps you can take if you are applying right now

This section lays the groundwork for an easy home loan process. In the following pages wel discuss securing a mortgage pre-approval and compiling the necessary documentation for your mortgage.

In case you missed it, the first part of this mortgage planning guide covers timing mortgage interest rates and managing your investment.

What should your credit be like?

For starters, let's take a minute to run through what a mortgage lender wants to see in your credit profile:

  • A decent credit score. (No surprise there, huh?) Goods usually means above 620, although you'll still be able to get a subprime loan with a lower score.

  • Having three open and active lines of credit (loans or credit cards) is considered ideal by lenders.

  • At least one year of paying bills on time under your belt. Having recently paid your credit commitments on time can help a lender forgive past credit weaknesses.

However, if you don't have established credit and are less than six months away from your expected home purchase, don't open credit accounts just to have something to show. Every time you apply for credit, a record of a credit inquiry is made on your credit report and having a lot of these or any at all during past six months can hurt your chances of getting a favorable home mortgage.

Likewise, try and put some space (like a couple of years) between yourself and a major credit problem, like a bankruptcy. But there are a few credit issues you can (and should!) take care of right now.

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If you have had credit problems in the past, our recommended sub prime lender, FullSpectrum will approve you for a credit-building mortgage that will help build your credit, and your equity at the same time.

Improving your credit months before the mortgage

One thing should definitely be done before you get a mortgage: get your credit report. Consumer advocates estimate that up to 80% of all credit reports contain errors and some of these (like a misreported foreclosure) are so serious they could prevent you from buying a home.

The sooner you take a look at your credit report, the more time you have to fix any mistakes or discrepancies it contains.

If you find an error, the credit agency is legally bound to investigate it and correct the mistake. However, this can take months, so the earlier you get a copy of your report the better. Do not skip this step! It is so easy and so important!

Another (pretty obvious) word about mortgages is that having the funds for a large down payment at purchasing time can get you a far better interest rate when applying for a home mortgage. Big DPs make lenders feel more secure, so budgeting as much as possible in the months before your mortgage is definitely smart.

Finally, if you have any small outstanding loans, pay them off. Same for collections or judgments against you. Having any of these pending when you apply for your home mortgage can only hurt you.

But what if you're in the market for a house right now? There's still stuff you can do to make yourself into a better credit risk.

Improve your credit now!

First, and most importantly, get copies of your credit report and credit score if you haven't done so already. Although you may not be able to complete the entire investigation of an error before your mortgage application is reviewed, at least you can make the lender aware of the problem and formally lodge a complaint.

This is not the same as getting a mistake erased from your report, but it is better than having mortgage lenders think you don't care about past obligations.

If you have more than three open lines of credit (like credit cards) it's a good idea to consolidate this debt. Close any accounts you're not using, and consider transferring your credit card balances to one account.

Paying off any of your outstanding loans can also be beneficial. However, you may not want to blow your cash savings on paying off other credit obligations if it means you'll have no money for a down payment.

Converting "luxury assets" to cash can put you in a better down payment position, too.

If you have very little or no credit, and you don't have the time it takes to create a history, there are still things you can do to portray yourself as a responsible consumer. Save your cashed rent and utilities checks, and consider asking your landlord for a statement of good standing if you have had a long and responsible relationship. These "proofs" of financial responsibility do not carry as much weight with a lender as established credit accounts, but they help.

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If you have bad credit, or no credit at all, you can get approved at FullSpectrum, our recommended sub prime lender, for a credit-building mortgage that will help build your credit, and your equity at the same time.

There are always special and sub prime mortgages for those who want to buy a home, but don't have all the financial pieces in place.

Remember, it's really important to choose the mortgage that fits your needs the most closely.

Next: Deciding how much house you can afford.

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