How Credit Affects a Mortgage Loan

How Credit Impacts Home Mortgage Loans

When applying for a mortgage loan, you want to make sure that your credit profile is as high as possible. Your credit profile has a significant impact on your loan. Your credit profile will affect the home loan interest rate, your ability to qualify for the home loan, and the type of home loan program you can apply for.

Since your credit plays an important role in the home mortgage process, it is important to understand the relationship between credit and mortgage qualification. Before applying for a home loan, it is important to know what you can do in order to have the best possible credit profile.

Bankruptcy and Foreclosures

Bankruptcy and foreclosures are two of the biggest items on a credit report that can significantly impact the home loan decision. On bankruptcy, depending on whether it is Chapter 7 or 13 bankruptcy, one might have to wait 2-4 years before the mortgage will be approved. FHA home loans allow a homebuyer to qualify with a bankruptcy if the bankruptcy 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 credit report bureaus since the bankruptcy was filed.

Foreclosures have a significant impact on the ability to qualify for the home loan as many home mortgage loan programs require a client to wait 3-5 years from the foreclosure date before the mortgage can be approved. Short sales, depending on how they are reported on the credit reports, can be treated like a foreclosure when a home loan company is making a mortgage decision.

Judgments and Liens

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

Credit Score

The credit score is the number the companies 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 qualify for the home loan 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 home mortgage loan.

What affects Credit Score and How You Can Raise Your Score

Obviously, paying all credit debts on time has a major impact on the 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 mortgage payment when trying to refinance or purchase a new home has a huge impact on the ability to get approved. Many home mortgage loan programs 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 major impact on your score. Maxed out credit cards will reduce 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 $5000 credit card limit, then you do not want to keep more that a $500 balance on the credit card. Paying down your revolving debt or consolidating your revolving debt into an installment loan will help raise 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 Mortgage is 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 mortgage process! Adding new debts while still in the loan process could affect your ability to close your home loan. So it is best to wait until the home loan has closed and funded before adding any new debt to your credit profile.

David White is a home loan specialist with the Texas Home Loan Team at Prospect Mortgage specializing in Dallas home loans