Your credit score has a significant influence on the mortgage interest rate that lenders will offer you. Knowing what lenders look for and how to maintain your credit report will give you an edge when applying for the mortgage you want.
If you are looking for the best interest rates in the market then most lenders will want to see a minimum of a 680 beacon score on your credit report. Some specialty programs may require a 700 or 720 beacon score, but generally, a 680 score is required to qualify for best mortgage interest rates.
Though, lenders look at more than just the credit score. They will also look at other factors to determine how you manage credit.
1. The Number of Credit Items: How many credit items are on your report? Most people will have 4 to 6 credit items such as credit cards, car loans, mortgage, Line of Credits, etc. Though, if you have more than 10 credit items this might be excessive and a lender will want to know why you have so many different credit items. Why do you need this many credit items?
2. Utilization of Available Credit: Having credit is a good thing and using credit is a necessity for many people to manage their day-to-day lives. It is also common that people carry balances on their credit cards and lines of credits and this is okay in the eyes of lenders. However, if you are consistently carrying a high balance, relative to your credit limit, for a long period of time, this can have a negative impact on your credit score and give concern to lenders. High balances mean consistently carry 80% or more of your credit limits. It suggests that you are up to your neck in credit and carrying it for a long period of time suggests that you are not able to pay it down.
3. Late payments: No surprise here, having many late payments on your credit report will negatively impact your credit score and is something that needs to be explained to potential lenders. From my experience, a small number of late payments sprinkled over a long period of time tends to be okay and does not significantly impact your credit score. Several late payments in a row on the same credit item is something that needs to be explained why this happened and can negatively impact your score.
The “kiss of death” for any mortgage applicant is if you have been late on a mortgage payment. If it gets reported to the credit agency, even a single late mortgage payment, will mean that most lenders won’t even talk to you. Most lenders can accept a small number of late payments on your credit report from other trade lines such as credit cards, but not a late mortgage payment. Whatever you do, you must make your mortgage payment on time every time.
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