When applying for a mortgage, understanding your credit score and its role in the process is essential. Not only does this help you avoid potential pitfalls, but it may also save you money in the long run by helping to identify potential savings opportunities.
Before applying for your mortgage, it’s wise to get prequalified with several lenders. This will enable you to compare options and decide which lender best meets your needs. Once selected, complete a full application with that lender and provide them with all of your financial documents.
You will likely need to provide income and employment details, as well as your FICO score and credit reports. Lenders use these details to assess your credit history and the likelihood that you can repay the loan on time. In case you are self-employed, lenders may request W-2 forms and other tax paperwork.
Your Credit Cards & Other Debts
Most lenders require a list of your current credit cards, retail accounts, and finance company accounts. They’ll also want to see your payment history on these accounts–including any late or missed payments–because this helps boost your credit rating and could mean lower interest rates on mortgage loans in the future.
Debt level is another crucial consideration when applying for a mortgage. Most mortgage lenders will look into the balances on your credit cards and other loans to make sure you aren’t overextending yourself financially. If there’s too much credit available, it could make it harder to qualify for an approval.
Excess credit can have a detrimental effect on your credit score, making it harder to secure loans with favorable interest rates. To reduce the risk of this occurring, try to carry minimal debt balances.
Your Assets and Liabilities
A lender will review your assets, such as cash (checking and savings accounts), investments, and retirement accounts. They’ll also look at the last two months’ bank statements to confirm you have enough money available to cover monthly expenses and mortgage payments.
Checking Your Credit Report and Score
Acquiring a copy of your credit report is the initial step to checking your score. You can do this by going online to each major bureau: Equifax, Experian and TransUnion. Each bureau will charge you a nominal fee for each report.
Your Credit Report is a record of your credit history that includes information about credit card and loan payments, as well as public records such as bankruptcy, foreclosures, judgments, suits or liens. It also shows your credit utilization (the total amount owed compared to available credit), which directly influences your credit score.