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How Bad Credit Factors into Buying a Home
Author David Schneider | Nov 14,2007
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Okay, you’ve scoured the neighborhoods, gone to open houses and found the home of your dreams. More importantly, this dream house comes with a dream sale price. All that’s left is to put an offer in and sign the papers, right? Not necessarily. Depending on your credit, you may not be able to qualify for a mortgage loan. Unfortunately, no mortgage loan means that perfect house could become someone else’s dream.
Your credit history is a major factor used by lenders to determine whether you gain loan approval. Due to this, you need to know how your bad credit factors into your ability to buy a home.
Why is Credit Important to Mortgage Lenders?
Mortgage companies lend you money with the expectation of getting it back (plus extra). Due to this, they want to minimize the risk of losing money on their loan by only accepting borrowers who have the ability and responsibility to pay their mortgage loan in a timely manner. Reviewing your credit history is a great way to do this, because it provides a good snapshot of how you handled previous debts and financial responsibilities.
Credit Payment History
Many items in your credit report are of particular interest to a mortgage lender. Payment history is one of the most important. Your payment history tells the mortgage lender how likely you are to pay your debts on time. If you have a significant amount of late payments, then this may affect your ability to acquire a mortgage loan. Obviously, if you made past payments on time and in full, then the mortgage lender will assume that you are a low risk to do the same on your mortgage loan.
Amount of Credit Owed
Your credit statement will also include how much money you currently owe. The total amount includes all balances you currently carry on credit cards, loans and other debts. To put your particular debt owed into perspective, mortgage lenders calculate your debt-to-income ratio. By dividing the total amount of your monthly debts by your monthly income, they can gauge your ability to pay your debts comfortably. Typically, lenders do not want your debt-to-income ratio to be higher than 38 percent. If it is more than 38 percent, then they may be reluctant to approve you for a mortgage loan.
Length of Credit History
Mortgage lenders also take the length of your credit history into account. Ideally, they would like to see a nice, long history of paying your credit obligations on time. This helps prove to them that you are a financially responsible individual. A short credit history, on the other hand, doesn’t instill quite as much confidence. If you do not have more than a few years of credit history built up, then it may affect your ability to buy a home.
Types of Credit
The final major portion of your credit history that mortgage lenders take into account is the types of credit you have. There are wide varieties of credit responsibilities that end up in your credit report. This includes everything from credit cards and auto loans to utility bills and gym memberships. Preferably, mortgage lenders would like to see similar debt obligations to a mortgage loan. Therefore, previous loans weigh more heavily in your favor (or disfavor) when applying for a loan.
Okay, you’ve scoured the neighborhoods, gone to open houses and found the home of your dreams. More importantly, this dream house comes with a dream sale price. All that’s left is to put an offer in and sign the papers, right? Not necessarily. Depending on your credit, you may not be able to qualify for a mortgage loan. Unfortunately, no mortgage loan means that perfect house could become someone else’s dream.
Your credit history is a major factor used by lenders to determine whether you gain loan approval. Due to this, you need to know how your bad credit factors into your ability to buy a home.
Why is Credit Important to Mortgage Lenders?
Mortgage companies lend you money with the expectation of getting it back (plus extra). Due to this, they want to minimize the risk of losing money on their loan by only accepting borrowers who have the ability and responsibility to pay their mortgage loan in a timely manner. Reviewing your credit history is a great way to do this, because it provides a good snapshot of how you handled previous debts and financial responsibilities.
Credit Payment History
Many items in your credit report are of particular interest to a mortgage lender. Payment history is one of the most important. Your payment history tells the mortgage lender how likely you are to pay your debts on time. If you have a significant amount of late payments, then this may affect your ability to acquire a mortgage loan. Obviously, if you made past payments on time and in full, then the mortgage lender will assume that you are a low risk to do the same on your mortgage loan.
Amount of Credit Owed
Your credit statement will also include how much money you currently owe. The total amount includes all balances you currently carry on credit cards, loans and other debts. To put your particular debt owed into perspective, mortgage lenders calculate your debt-to-income ratio. By dividing the total amount of your monthly debts by your monthly income, they can gauge your ability to pay your debts comfortably. Typically, lenders do not want your debt-to-income ratio to be higher than 38 percent. If it is more than 38 percent, then they may be reluctant to approve you for a mortgage loan.
Length of Credit History
Mortgage lenders also take the length of your credit history into account. Ideally, they would like to see a nice, long history of paying your credit obligations on time. This helps prove to them that you are a financially responsible individual. A short credit history, on the other hand, doesn’t instill quite as much confidence. If you do not have more than a few years of credit history built up, then it may affect your ability to buy a home.
Types of Credit
The final major portion of your credit history that mortgage lenders take into account is the types of credit you have. There are wide varieties of credit responsibilities that end up in your credit report. This includes everything from credit cards and auto loans to utility bills and gym memberships. Preferably, mortgage lenders would like to see similar debt obligations to a mortgage loan. Therefore, previous loans weigh more heavily in your favor (or disfavor) when applying for a loan. |
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