How Credit Problems Affect Getting a Mortgage
A borrower's credit report and score have a vast impact on his ability to procure a new mortgage. One line item on a credit report or a lower than acceptable credit score can prevent a borrower from qualifying for the type of mortgage that he wants, or even prevent him from qualifying for a mortgage at all. It is in a borrower's best interest to have the highest possible credit score and the cleanest credit report prior to applying for a new mortgage debt.
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Significance
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A borrower's credit score gives the lender a numerical representation of his current and past credit history. This number reflects a borrower's willingness and ability to repay debt. The higher the number, the better a borrower's chances for loan approval and the most favorable interest rates.
Function
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A borrower's credit report outlines his credit history; it documents each loan opened and closed within a preset time period. It also lists any negative items such as liens, judgments, collections, foreclosures and bankruptcies. Those negative items will not only lower a borrower's credit score, but may prevent him from getting a mortgage.
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Time Frame
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For most conventional loan programs, a borrower will have to be discharged from bankruptcy for two full years prior to procuring a new mortgage. The same rule holds true for foreclosures. Additionally, a borrower will have to wait a full year from a 30-days late mortgage payment to refinance or purchase a new mortgage. The waiting period is two years for a 60-days late payment and three years for a 120-days late mortgage payment.
Considerations
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Other negative items on a borrower's credit report, such as liens, collections and judgments may be required to be paid in full prior to the mortgage loan closing in order to qualify for the new debt. A borrower may attempt to raise his credit score prior to loan closing in order to qualify for the mortgage, or to get a lower interest rate. In most cases, the most favorable rates are offered to borrowers with credit scores above 720. In order to qualify for a government mortgage, the borrower will need a credit score of 580 or above and to qualify for a conventional mortgage, he will need a score of 620 or above.
Prevention/Solution
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Prior to applying for a new mortgage, a borrower should check her credit score and report. Immediately, she should report any errors to the credit bureau. To quickly raise her score, she can pay down her credit card debt to less than 30 percent of the limit, as well as pay any negative items in full. It should take 30 to 60 days to see any errors or changes reflected in the credit report and score.
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References
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