Mortgages - Know the Score Before You Apply
Buying a house is an expensive and stressful process. If you are planning on buying a house this year, and an increasing number of consumers are, paying attention to your credit scores can help keep your finances and stress levels in check.
Mortgage eligibility factors
Mortgage lenders are in business to make money. They do so by lending you money at a rate which is profitable to them and which balances the risk of you not making the repayments. To arrive at the balance between profits and risk, each lender evaluates your application based on a number of eligibility factors.
The specific factors vary between lenders but all lenders will take in to account your:
- Employment status
- Credit scores
Income and employment status speak for themselves; an applicant with neither is unlikely to secure a mortgage. If your application is successful, the cost of your mortgage will quite often be determined by your credit scores.
Your credit scores and mortgage affordability
- Your payment history
- Outstanding debt
- Length of credit history
- New lines of credit
- Different types of credit used
When considering your credit scores in light of your mortgage application, lenders look for:
- Low outstanding balances
- A long credit history
- Payments made on time
- Mix of loans, preferably car loans and credit cards
In short, lenders use your credit scores to determine how much your mortgage is going to cost. Mortgage lenders use the FICO score and the higher your FICO score, the better.
Your FICO score and mortgage repayment costs
Your FICO score is a number between 300 and 850. It is calculated using the credit report data held on you by the three credit bureaus, Equifax, Experian and TransUnion.
How does this factor into your mortgage affordability? The higher your credit scores, the more loan products will be available to you, and at lower interest rates. For example:
- A high score (between 760 and 850) will mean more choices and lower rates of interest.
- A lower score (less than 620) will mean fewer choices and at higher rates of interest.
- A low score (less than 520) will mean you are unlikely to secure a mortgage.
A lower score resulting in a mortgage with higher interest rates will cost you more in monthly repayments, making the mortgage considerably more expensive over its lifetime.
If you have a low score, all is not lost. A large down payment, large cash reserves and a low debt to income ratio can all help improve your mortgage affordability, even when your credit score is low.
Check your scores now to help secure a mortgage later
It's a good idea to check your credit scores annually and six months before applying for a mortgage. Where the loan amount is the same, the difference between a lower score (620-639) and a higher score (760-850) could be as much as $283 per month. A nasty and expensive surprise if at the time of applying for a home loan you find your credit scores are lower than expected.
Checking your scores in advance of a mortgage application gives you the opportunity to check for and address any errors. Being aware of your credit scores also gives you the opportunity to budget towards reducing your outstanding balances, always a worth cause when the costs, and excitement, of a new home are on the horizon.
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