Before you try to purchase a home, make sure your finances are in top shape. In the wake of the housing market collapse, lending standards tightened significantly. One certain factor you should consider is your credit score.
This three-digit number can have a lot of control over the mortgage rate you receive. Luckily, if you have a damaged or short credit history, you may still have options. FHA mortgage loans have looser standards when it comes to credit scores. However, if you have a higher number, you may only need to make a smaller down payment. This makes your score very important.
A conventional FICO credit score ranges between 300 and 850. To get an idea of where you stand, order a copy of your credit report from one of the major credit reporting bureaus: Experian, Equifax or TransUnion. Under federal law, you are entitled to a free copy from each of these companies every year, so why not take advantage?
What contributes to your credit score?
As you look over this document, you may have some questions about how your score is determined. Unfortunately, there is no single answer for this. Instead, there are a number of different factors weighing in on your score.
â¢ If you have many different types of credit, this can help your overall score. Having a diverse credit portfolio can demonstrate to other lenders that you are responsible with debt. If you have a credit card, auto loan and make regular student debt payments, these can all be good signs.
â¢ The amount of debt you have is also a factor. Your debt-to-income ratio is very important. If you have large amounts of debt, that ties up a lot of your money. This may be a red flag to mortgage lenders, as you may not have enough money left over every month to make home loan payments.
â¢ Your payment history is also important. Nowadays, everything from credit card to cable bill payments may determine your credit score. Late payments reported to a credit agency could downgrade your credit score.
â¢ The length of your credit history also influences your credit score. Unfortunately, this puts younger borrowers at a disadvantage, since they have had less time to build their history. A longer history can paint a clearer picture about what kind of borrower you really are.
Before you apply for a line of credit, it’s very important not to apply for any other lines of credit before you start looking for home. No matter how small, don’t do this. Opening new accounts can have a negative impact on your credit score. Doing this just before you apply for a major line of credit could be a red flag that you may be on a spending spree.
Other red flags
Many factors could have a negative impact on your loan eligibility, even if the Federal Housing Administration backs it.
For example, if you have no credit history at all, lenders may pass you over. In addition, filing for bankruptcy can also be a concern. If you are in this position, the FHA may request a full explanation of the situation and evidence that you have made a serious effort to rebuild your credit.
Losing your property to foreclosure is another mark that can mar your credit history. However, if the foreclosure was a result of a specific circumstance, such as divorce or serious illness, lenders may be more understanding.
Qualifying for a home loan is a major step in your personal finances. Freedom Mortgage is here to keep you up-to-date on the latest tips and tricks of the mortgage industry whether you’re looking to improve your home value or simply make a mortgage rate comparison.
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