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How Your Credit Score Really Impacts a Mortgage Loan

07/26/2010

Your credit profile affects several aspects of the mortgage loan process. It determines the interest rate. It determines the loan programs for which you may qualify. It even determines whether your mortgage application will be approved or denied. Before you shop for a home mortgage, do everything you can to improve your credit score and profile as much as possible. Later on, you'll see how.

But first, let's look at several issues that impact your credit profile and home loan qualification.

The credit score

This three-digit number is the key to the best mortgage deals and interest rates. Higher credit scores mean better terms and more competition for your business. Lower scores suggest you're a higher credit risk may make you ineligible for certain mortgage programs and the lowest interest rates. The minimum credit score required for an FHA home loan is 580, however many lenders prefer to work with borrowers whose minimum score is 620. That's the score conventional loans require. But without a 20% down payment, conventional loans require a minimum score of 680.

Liens/Judgments

Liens and judgments appear on your credit reports. Chances are good your home mortgage application won't be approved until you pay off these debts and get any liens and judgments released.

Bankruptcy/Foreclosure

These appear on your credit reports too and will also affect your credit profile as well as your chance of mortgage approval. With a Chapter 7 or Chapter 13 bankruptcy, expect to wait between two and four years respectively before obtaining mortgage approval. With an FHA loan, you'll only have to wait two years after filing to qualify. In the meantime, start reestablishing credit by charging small amounts and making timely payments.

With a foreclosure on your credit report, expect to wait between three and five years before a lender approves your mortgage loan application. For mortgage approval purposes, lenders sometimes treat short sales the same way they do foreclosures.

Issues that affect credit score

Late payments

Missed or late payments lower your credit score and require between six and eighteen months of timely payments before the previous score is restored. That's why it's so important to make your debt payments on time. The same is true with your mortgage payments. Missing just one during the past 12 months can sabotage your chances of obtaining new mortgage or mortgage refinance approval.

Credit card balances

Charging up to the credit limits also lowers your credit score. As a rule of thumb, try to limit your credit card balances to no more than 10 percent of the available credit amount. You can increase your score by repaying revolving credit as soon as possible and/or consolidating it into an installment-type loan.

One final word

Never incur new debt while your mortgage application is being processed. Doing so could jeopardize your closing date. Hold off until the keys to your new home are in your hands.

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