Poor Credit Standing Can Hurt Your Chances for Mortgage Qualification

The recent fluctuations in the national housing market has been a point of consternation among many people who are now feeling good enough about their finances to buy a home, usually for the first time in years, or potentially even ever. Now, it’s generally agreed that consumers hoping to lock in the most affordable prices they’ll see in a while will need to do so within the next few months. If you’re a hopeful homebuyer, that might mean you’ll have to take some basic steps to get the credit fix you need.

You might have found it a lot easier to qualify for really good terms on a number of different kinds of credit in the past few years. While many lenders tightened restrictions on financing of all kinds during and then even following the recent recession, they once again loosened them on some of the ones that come with lower balances in general. It’s now far easier to get a high-quality credit card deal or even auto loan than it was just a few years ago, but when it comes to mortgages, which have huge price tags for banks and consumers alike, their controls have remained extremely tight.

For that reason, if you’re looking to qualify for the very lowest mortgage rates available, and lock them in while prices are still at levels lower than those prior to the recession, you’ll probably have to do a lot of credit repair work in a relatively short period of time to make sure you’re up to snuff. Experts generally don’t think the current low interest rates will be around much longer, and likewise, prices are expected to continue rising for most of the next two years (though by how much they do so remains very much up for debate).

Why this is important

The fact of the matter is that even if your credit score is good, that might not be enough to ensure that you receive the most affordable home loan deal available today. Many lenders will actually require that you have excellent credit, in addition to a sizable down payment — typically in the neighborhood of 20 percent or more — to approve a mortgage application and give you the lowest-cost rates and fees available. For this reason, even a relatively healthy credit standing blemished by a few instances of mismanagement can be enough to sink your chances to qualify.

As such, you’ll need to smooth over any imperfections with regard to your credit situation, starting with your payment history and the amount of debt you’re carrying. These two factors alone make up 65 percent of your scores, and thus any mistakes you’ve made with regard to them, even if it’s as relatively minor, in your mind, as missing one payment in the several months or more, or carrying more debt than you probably should. Simply put, any time you miss a payment, it’s a big deal that can lower your credit score by a hundred points or more, and having even a few thousand dollars worth of debt might not be advisable if you have relatively low credit limits or only a small number of cards.

In general, the only way to make up for these credit missteps is to ensure that you haven’t had any missed payments in the last year or so — and in some cases mortgage lenders might want it to be even less recent than that — and have the amount of money you owe on all your accounts to be as low as possible. Banks look at a measure called “debt to income ratio” when determining your eligibility, and the less you owe, obviously, the more likely you will be to receive approval of your mortgage application.

What else can help?

Cutting into your debt and ensuring that you’ve made all your payments on time and in full can obviously be a huge help in improving your credit standing and thus making you a more attractive applicant when it comes to a home loan, but other issues, including ones you might not have even known about, can also plague you when you’re trying to boost your scores.

For instance, if you have any unfair markings on your credit reports, your standing could be diminished dramatically even if you had little or nothing to do with the problems. For this reason, it’s important that you regularly order copies of these documents and check them over closely for anything that you don’t recognize and which could become more problematic down the road. If you spot any such entries on your reports, it might be wise to contact a credit repair company about the issues, which may help to get them cleared up as quickly as possible.

Posted in Mortgages
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