Understanding Your FICO Score and Preparing to Secure a Home Loan
Your credit scores, credit history, and your income, it may come as no surprise, have a great deal to do with how much of a home loan you can qualify for and at what terms. A great credit score can make all the difference when it comes to how much you pay for a loan over the course of its term. This may not seem like a big deal at first, but on a thirty-year mortgage, the difference can be staggering.
Your debt-to-income ratio, any late payments, repossessed items, bankruptcies, and several other factors all go into determining your credit score. But credit reporting bureaus are far from infallible, and with all the data breaches and identity theft happening these days, not all items that count against you on your credit report may be your fault. So, before you set up an appointment to apply for a mortgage, here’s what you need to know and do about your credit.
Your Credit Report and Score Are Not Written in Stone
Yes, certain things such bankruptcy, foreclosure, and repossession can take several years to fall off your credit report. But smaller negative items like late payments and missed payments will come off after shorter periods.
Your credit report may be the window that lenders look through to determine your character and to evaluate the potential risk involved with loaning you money, but there are things you can do to improve the picture of you that they will view.
Take a good look at the credit reports available from the three primary credit-reporting bureaus. Examine them closely for accuracy, looking for evidence of identity theft. You will also want to make sure that there isn’t information related to someone else, or to accounts of yours that is invalid.
You can petition the bureaus to correct your reports, but it can take time and patience to get corrections made. If they move the needle on your score, however, it’s totally worth the effort.
Understanding Your Capacity to Borrow
Your debt-to-income ratio is a very important factor when it comes to applying for a mortgage. Lenders will take a look at how much money you make, any assets you may have that could be liquidated quickly, and any capital that you may have. They will also review how much debt you are carrying in total, and the monthly maintenance on those debts to get a picture of what you can reasonably afford to pay back.
There is no generally accepted ideal debt-to-income ratio, but most lenders are looking for you to have no more than forty to fifty percent of your pre-tax income going out to service debts in any given month.
There are ways you can improve your debt to income ratio, such as taking on a second job and paying down your debts, namely. Also, having a significant amount of capital or assets can make up for a poor debt-to-income ratio in many instances.
Getting the Best Loan With the Best Terms
Generally speaking, those with the best credit scores and the most available income and assets tend to borrow money on the most favorable terms. If this seems unfair – that those that don’t need credit get the best credit – just consider things from a lender’s perspective.
People with good credit and high incomes represent the least amount of risk. The best thing you can do for your ability to borrow is to make yourself look as risk-free as possible, and the best way to do that is to manage your credit wisely and well.
