Establishing Credit


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What Your Credit History Says to a Mortgage Lender

If you’re thinking about buying a house, the first thing you need to do is speak with a mortgage lender and get pre-approved. This preliminary step can save you time and heartache.

A pre-approval isn’t required to look at homes or bid on a property, but it does work to your advantage. Since this involves a lender checking your credit history and reviewing your income, you’ll learn early on whether youre eligible for a home mortgage and how much you can afford to spend. And if youre not eligible, you can improve your financial health and buy later.

Although lenders primarily look at your income to determine how much you can afford, your credit report plays an important role in the approval process. Of course, the bank looks at more than just your credit score. They pull your entire credit file, and your credit history reveals a lot about the type of applicant you might be. You can have sufficient income to buy a home, but if there are problems with your credit report, a lender may deny your application.

Here are four things a bank may conclude after looking at your credit report.

1. You won’t pay your mortgage on time

Credit reports list all of your old and current credit accounts from auto loans to credit cards. There’s also information regarding whether these accounts are in good standing. If you make monthly payments on time every month, creditors will update your credit report with the statement “paid as agreed.” However, if youve had a problem with timeliness in the recent past, your creditors may report an account as 30 days, 60 days or 90 days past due. Banks pay close attention to these notations. If you have a history of paying bills late, chances are youll pay the mortgage late.

2. You might be experiencing financial problems

Each application for new credit triggers a new inquiry on your credit report, which can be damaging since they lower your credit score by two-to-five points. Inquiries also remain on your credit report for up to two years. If a bank checks your credit and notices several inquiries for credit cards or personal loans in a short span of time, it can appear as if you’re desperately seeking financing. This is a strong indicator of credit problems.

According to MyFico, people with too many credit inquiries have a higher risk of filing bankruptcy. Since banks dont want to take a chance on potentially risky loan applicants, too many inquiries can hurt your chances of getting a mortgage.

3. You have a spending problem

Your credit report not only lists every credit account you have, but also current balances. As part of getting pre-approved, the bank calculates your debt-to-income ratio to determine how much you can afford. So, it helps to pay off as much debt as possible before apply for a mortgage. Whereas low credit card balances indicate self-control, having several maxed out credit cards indicate a potential spending problem. P

lus, too much debt can lower your credit score, to the point where you may not meet the bank’s minimum credit score requirement. And if you do qualify for a mortgage, the lender might charge a higher interest rate because of high debt.

4. You dont have enough credit experience

Your credit report also reveals the length of your credit history. And unfortunately, if youre just recently establishing credit and you dont have a lot of accounts under your belt, some lenders will not approve your mortgage. Of course, this isnt the rule across the board, so if one bank turns down your application, you might have better luck elsewhere.

Keeping your credit report in good shape is one of the best ways to improve your odds of getting approved for a mortgage loan. Your income is important, but if you have bad payment habits, a spending problem or other issues with your credit history, these factors can stop a mortgage approval.

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