Credit and Security Financing
In my last post, I discussed real estate financing 101 – what is a mortgage? and how will lenders evaluate you (the 3 C’s – credit, collateral, capacity)? Today, we are going to be talking about credit and how it affects your ability to secure financing. I said we were going to talk about credit, income, and assets, but, in an effort to keep these posts to a digestibly short length, I have decided to divide this large topic into credit today, and income and assets next week.
Let’s jump into it. When you begin the process of getting pre-approved for a mortgage, lenders will run a credit check. Many people think it is just about your credit score, and, while that is important, there is more to your credit reputation than just your score.
Understanding your credit score is important, so let’s start there. (Read more about your score, its components, and its importance: At BankRate.com, SmartAsset.com and Realtor.com.) There is no one number that you have to have, but it is important to know that your score may affect your interest rate, determine whether you can get a mortgage from certain lenders, and what loan product you can get. I’m not a lender and this information is intended to give you a general understanding of the topic, but please make sure that you speak to a lender directly because each lender has their own risk tolerance and each person’s situation is different. A score of 680 and above may be ideal for some lenders. In order to qualify for an FHA loan with a 3.5% down payment, you should have a minimum score of 580. If your credit score is between 500-580, it doesn’t mean you are necessarily excluded, but you may need to put down at least 10%. Typically, you will need at least 620 for a conforming loan. (Read more at the Mortgage Report.)
Credit involves more than just your credit score; it covers your overall credit reputation. Lenders will be looking at your credit history, see if you have any judgments against you, what liens are held against you, and if you have anything in collection. They are also going to be looking at your payment obligations and trade lines (student loan, mortgage, credit card, etc.). These will show when that credit was extended and closed, the credit limit, the maximum amount you ever owed, dates you were delinquent, and the total amount currently owed. These trade lines need about six months to fully establish. You can probably imagine that too many obligations can count against you, but so can too few. If you haven’t been in the country for at least six months or have no active trade lines, it can complicate your efforts to secure financing. Not sure where you stand? Talk to a lender early! You don’t want to find the perfect house and then find out you have some work to do to get your financing in order.
Next week we will pick up income and assets and how they affect your ability to secure financing for your real estate transaction. Stay tuned.