Credit Scores, Loans and Mortgages

When applying for a Park City home loan or mortgage it is becoming even more important to have your finances in order. With the recent sub-prime lending problem mortgage companies have tightened their lending guidelines making more different to borrow money, especially if your credit score is not the greatest.

Credit Scores

So if you are intending to buy a house your credit score had better be in order. Credit scores provide the lender with an indication of how much a credit risk you are, if you have a credit score close to 800 then you are deemed to be very little risk, if you have a score below 600 then you are a high risk.

How do the companies come up with your score? There are 3 main credit bureaus in the U.S. each of which keeps a record of how good you are at paying your bills. There are numerous different criteria that go into making up your score but the main ones are:

  • Do You Pay On Time. The credit bureaus keep a history of you loan / credit card payments. If you pay on time then your score improves, but if you are late it may make your score go down (depends on how late and when the lender reports to the bureau). They also prefer you to carry a small balance on your credit cards rather than paying off the full amount each month.
  • Length Of Credit History. If you have a long history of making payments on time then this will reflect better than if you have a short history.
  • Types Of Credit. The more different types of credit you have experienced the better. If all you have had is a credit card then the lender does not know how good you will be at paying off a fixed monthly bill like a mortgage.
  • Dept To Income Ratio. This is a posh way of saying how much dept do you have compared with how much you are earning. If you have $20,000 worth of debt and are earning $150,000 a year then this is not a problem. But if you have $10,000 of dept and only earn $30,000 a year then you do not have as much disposable income, and therefore are seen as a greater risk.
  • Opening New Credit Lines And Closing Existing Lines Of Credit. If you have just taken out a loan for a new car then the credit bureau don't know how good you are at making the payments, i.e.. you have no credit history. One thing that sometimes catches people out what happens when you close a line of credit. You may think that this will improve your score, well it may actually make your score go down. If you are one of those people who keep getting new credit cards keeping them for a while and then closing them this may not be good. The people who are lending you money like to see long term credit history for each loan / credit card not someone who keeps chopping and changing their sources of credit.

Other Factors Used in Your Mortgage Application

Credit scores are one of the main factors that loan officers use when determining how much they will loan you, but there are also other factors that they take into consideration.

  • How Long Have You Been Employed. Mortgage companies like to see a stable employment history. They don't like it if you frequently change jobs, especially if you also change careers. If you are self-employed then they usually want to see 2 years worth of income before they will consider you for a mortgage.
  • Recent Major Purchases. If you have recently made a major purchase via a loan or other form of financing then this could impact your mortgage loan application. At the very least it will increase your dept to income ratio which means you will not be able to borrow as much as before.