The Top 10 Tips to Help Homebuyers Thrive in Today’s Current Home Market

Tips for Buying a Home Right NowThe economy has been slowly recovering for a while now, and home prices are starting to show it. An improving national economy means more people are getting new jobs, which means that the need for homes is also increasing. Some people want to buy a home because they don’t want to throw money away by renting anymore, some are changing jobs and need to move to a different part of the country, while others have found a better job and feel the need to upgrade their home.

No matter which category you are from, the increasing home prices and the raising interest rates are probably making you want to act quickly, before prices and interest rates go even higher. Prices and interest rates are much lower than they were before the housing market crash, but analysts say that they will keep increasing, so buying a home right now might not be such a bad idea (Read: 4 Things Home Buyers Should Look Out For With Mortgages Rates on the Rise).

However, needing a home and actually being able to buy one, or buy it at a good price, are very different. Getting approved for a mortgage loan is not that easy, especially if you are also recovering financially. Your credit score, income and debt will have a large influence on whether you will be approved for a mortgage or not. Even if you get approved, but you don’t have an ideal credit score or debt-to-income ratio, you will probably have to pay a much bigger price for the home. Also, getting a mortgage involves a large financial investment, which means that you will probably have to use some or all of your savings.

Tips for Buying a Home in Today’s Home Market

Getting a good deal and making sure that you don’t end up with a mortgage that you can’t afford can be done by doing a little research, consulting a mortgage professional, and having common sense. Here are the top 10 tips for those who are planning to buy a home in today’s home market. For even more reasons and tips see this.

  1. Figure out what you can afford. Put together a financial plan, which will help you determine how much you can afford. Home prices are still fairly low, but that doesn’t mean that you can go ahead and buy any home just because it’s cheaper than it was in the past. Having a mortgage that you can barely afford will cause problems in many aspects of your family’s life, and can result in losing the house. If you think you can’t manage setting up a financial plan, you can find a consultant who will work with you to determine how much you can afford to spend on a home (Read: Most Affordable Housing Markets in the US 2013).
  2. Start saving for the down payment. On a traditional mortgage, the required down payment is 10 to 20 percent. Even 10 percent can mean a large amount of money if the property that you plan on buying is expensive. Also, in order to avoid paying for Private Mortgage Insurance, you should aim to make a 20 percent down payment. By putting more money down, you also have the chance of receiving a better interest rate, which will help you save even more. If you can’t afford to make a 20 percent down payment, saving for it before you start looking for a home is a great idea (Read: Making a Larger Down Payment: Is it Worth it?).
  3. Try to improve your credit score. You need a good credit score to qualify for a mortgage, so anything less than what is considered a good credit score will result in rejection. But even if your credit score is in a “good” range, having a higher credit score will allow you to qualify for more advantageous rates, so you should do everything you can to increase it. Start by taking out a copy of your credit report, which you can get for free once per year, and look for any mistakes. These mistakes should be reported to the credit agency and corrected.
  4. Avoid making new debt. New debt can decrease your credit score, making it harder for you to qualify for a good interest rate. Also, lenders don’t like giving out large loans to someone who seems that is living on credit. You might think that opening a new credit card account will help your credit score, but it is actually the opposite. However, you should keep and use your old credit card accounts.
  5. Pay off some of your debt. Lenders will take your debt-to-income ratio into consideration when deciding on whether to give you the mortgage loan or not. Paying off some of your debt will help your ration, increasing your chances of being approved. Of course, to pay off some of the debt, you will probably have to use some of your savings, making it difficult for you to raise the 20 percent needed as a down payment.
  6. Get professional help. Hiring someone to work out a budget for you will help you figure out how much you can afford and save you a world of trouble in the future. After figuring out a price range for your new home, you should consult a real estate agent to help you find a home. Not only will a real estate do things quicker, but he or she also has access to more home listings, which will increase your options.
  7. Get pre-qualified and pre-approved for a mortgage loan. Getting pre-qualified for a mortgage loan is relatively easy. All you need to do is provide the lender with some info about your financial situation. Unfortunately, being pre-qualified for a mortgage means very little when the time to buy a home comes. Being pre-approved, on the other hand, is very important because things will move much quicker once you find a home that you want to purchase.
  8. Hire a home inspector. You might think that you have found your dream home, but unless you hire a professional to carefully inspect the property, you might have to pay for a new roof or plumbing system in only a few years. This is especially important if you are buying a distressed property. Hiring a home inspector will add to the cost of buying a home, but it’s probably the best few hundred dollars that you will ever spend. To read more about the reliability of a home inspector click here.
  9. Hire a real estate attorney. Ensuring that you understand all the terms and conditions in the contract, and what is included in the purchase price means a lot when making a home purchase. This is one of the largest purchases you will ever make, so even if your lender has an attorney present at closing, hiring your own will make sure that your interests are represented during the whole process.
  10. Start planning early and don’t be in a hurry to make a purchase. Because buying a home involves such a large initial investment, you shouldn’t rush into buying a home, even if prices are rising. Only make a home purchase after you have set a budget, the home has been thoroughly inspected, and you are sure that you can qualify for a good interest rate. Making a quick home purchase might work for seasoned investors, but a simple home buyer should take more time before making the decision to buy a home (Read: Renting vs. Owning: Which is Best for You?).

Buying a home in today’s home market requires you to act more quickly, but older home buying rules still apply, especially because you can still find many distressed properties in certain areas of the country at better prices. Making a home purchase can be a great experience if you take the time to set your budget up, do the research and make sure that you qualify.

Rising Rates Means More Rejections – 8 Ways to Make Sure Your Credit is Up to Par

Fix Credit to Meet Rising RatesThe interest rate that you will qualify for, when taking out a mortgage loan, has a large impact on how much money you will be spending on your mortgage over the life of the loan. Interest rates used to be at near record lows until not long ago, but it looks like those times are over. The economy is recovering and, with it, so are the interest rates. Mortgage rates have been steadily increasing lately, causing more people to apply for mortgages. Getting a mortgage loan while the interest rates are still relatively low has determined many people who were considering the purchase of a home act now, before rates climb to an even higher level (Read: 4 Things Home Buyers Should Look Out for With Mortgage Rates On the Rise).

The difference between all-time low interest rates and current interest rates may not seem like much. One or two percent sound like a very small difference, but if you consider the fact that it is one or two percent of several hundreds of thousands of dollars yearly, you might not think one or two percent is negligible anymore. That small difference can mean tens or even hundreds of thousands of dollars over time.

Unfortunately, the increase in interest rates has also resulted in an increase in the number of people whose applications were rejected. You can learn more about this if you click here. Because people were applying for a mortgage on a short notice, in order to still take advantage of the low interest rates, many didn’t have time to make sure that they can actually qualify for the mortgage. One of the most important requirements when applying for a mortgage loan is that you have a good credit score. Buying a home with a low credit score will attract a higher down payment requirement, a higher interest rate, and, many times, rejection.

The good news is that your credit score is one aspect of your financial life that you can improve by just making a few changes and taking a few precautions. Having a good credit score will not only allow you to qualify much easier and quicker for a mortgage loan, but also qualify you for lower interest rates, meaning that you will be paying much less on your mortgage each month (Read: Boost Your Credit Quickly With These Simple Tips).

8 Ways to Make Sure You Have a Good Credit Score

A good credit score is something that you can be proud of, because it means that you are a responsible person that knows how to manage his or her finances. Unfortunately, life doesn’t always go as planned and certain events, over which you have little power, can quickly ruin your credit score, making the purchase of a home very difficult or even impossible. Avoiding putting yourself in a situation where your credit score could be damaged is ideal and should be a top priority, but sometimes things that are out of your control happen, and the only way in which you can recover is by rebuilding your credit score.

Here are 8 ways in which you can make sure your credit is up to par when applying for a mortgage loan.

  1. Get a copy of your credit report. You have the right to a free copy of your credit report per year. Knowing what your credit report contains is very important when trying to make sure that you can qualify for a mortgage loan. By looking over your credit report you can get a clear understanding of what your credit score is, what problems you have, and how you can start improving (Read: The Top 10 Components for Maintaining a Good Credit Score).
  2. Find errors on your credit report and dispute them. Errors on a credit report are not very common, but they do happen. The best way to find them is to carefully read your credit report and look for any inaccuracies or misinformation. These errors could have a large impact on your credit score, so finding them and disputing them as soon as possible is very important (Read: How Your Credit Score is Calculated).
  3. Pay your bills on time. The easiest way in which you can make sure your credit score is in a good range, and actually improving over time, is to not miss any payments and pay your bills on time each month. Being late for even a month can have a large negative impact on your credit score, and jeopardize your chance of getting approved for a mortgage loan.
  4. Avoid having too much debt. Especially before buying a home, having too much debt can seriously lower your chances of being approved for a mortgage loan. Large debt will also lower your credit score, making it even harder to qualify for a mortgage. Waiting until after you have bought a home to make any other large purchases using credit is recommended.
  5. Don’t take out too many credit cards. Credit card applications will appear on your credit report, and will affect your credit score. Lenders will also see you as someone who takes out too much credit, and will be reticent when deciding if they should approve your mortgage application or not.
  6. Keep using your current credit cards. Just having a credit card is not enough to keep your credit score in a good range. Using your cards, even for small purchases will be reported and actually increase your credit score by establishing credit history. Simply closing credit card accounts that you are not using will decrease your credit score. Click here to read more.
  7. Pay off some of your debt. Paying off debt will increase your credit score quicker than anything else. Your debt-to-income ratio will also improve, increasing your chances of receiving a mortgage loan without much difficulty. Having an unfavorable debt-to-income ratio will usually result in a mortgage loan application rejection.
  8. Extend your credit limit. Extending your credit limit will decrease the percentage of credit that you are using compared to how much credit you can use. Lenders will be more likely to extend the credit limit for a good customer, so choose a credit card with which you have had a long and clean history. Unfortunately, the credit limit extension means a new credit report check, so your credit score may decrease a little, but should recover quickly.

Making sure your credit is up to par when applying for a mortgage loan is one of the best ways of increasing your chances of approval. Interest rates are increasing, so you might think that this is your last chance of getting a fairly good rate. The truth is that it is a good idea to get a mortgage before rates climb even higher, but applying for a mortgage with a sub-par credit score will only result in a waste of time and money (Read: What Credit Score Do I Need to Qualify for a Mortgage?).

What You Ought To Know About Mortgage Underwriting

What You Ought To Know About Mortgage Underwriting- 150x150When buying a home, the home buyer is going to pay hundreds of thousands of dollars over the life of the loan, while the lender is responsible with collecting that money. In order to protect himself, the lender has to closely examine the borrower’s ability to repay the loan. This is done through a process called mortgage underwriting. This is the process that will determine if the home buyer will receive the mortgage loan, and how easy it will be for the applicant to be granted the mortgage loan. Applicants who are regarded as low-risk will face little to no problems, while those regarded as higher-risk will have to provide additional information about certain areas of their financial situations. High-risk borrowers also have a high chance of being denied for a mortgage loan.

Mortgage underwriters are charged with finding any issues that the applicant may have now or in the future and carefully determine how much of a risk they are. Mortgage underwriting will take a close look at the home buyer’s debt-to-income ratio, income and credit score. These are the most important aspects of your financial situation, and the factors that will decide if you will be granted the mortgage loan or not. Mortgage underwriters also look at the applicant’s age, savings accounts, investments and other things.

Debt-to-Income Ratio

The debt-to-income ratio represents how much debt someone has versus their income. Having too much debt when compared to your income level raises a red flag for mortgage underwriters and can jeopardize your chances of receiving a mortgage loan and becoming a home owner. Lenders who give out mortgage loans that are not backed by government agencies such as the Federal Housing Administration or the U.S. Department of Veterans Affairs usually require borrowers to spend 30 percent or less of their monthly income on the mortgage loan. Also, the total percentage of your monthly income that is spent on all your debt should be less than 40 percent. Mortgage loans are sometimes granted to applicants with higher ratios, but it is recommended that the amount spent on debt each month to be as small as possible, in order to increase your chances of being approved for a mortgage.

Income

In order to verify your income, you will most likely need recent pay stubs, W-2 forms, and other documents. Failure to present these documents will usually result in your mortgage application being denied. Also, remember that lying about your income is considered criminal fraud and will attract problems that are much more serious than being denied for a mortgage loan. Providing proof of income may be harder for those who are self-employed, and mortgage underwriters will probably not grant the loan until this proof is provided.

Credit Score

Your credit score keeps track of your record on repaying borrowed money, so your lenders can figure out if you are a high or low default risk. A low credit score means that you have missed payments or even stopped paying your debt in the past, and will probably attract a mortgage application disapproval. High credit scores mean that you are a trustworthy borrower, and a low default risk, so you shouldn’t encounter any issues during the underwriting process.

Mortgage underwriting is necessary because the lender needs to protect himself from losing money when borrowers who can’t afford a mortgage apply for one. Understanding this process will make it easier for you to know what’s requested of you when applying for a mortgage, and what you can do to improve your financial situation in order to increase your chances of being approved for a mortgage loan.

Boost Your Credit Quickly with These Simple Tips

Boost Your Credit Quickly with These Tips- 150x150Even if your credit is in what is considered to be a good range, boosting it a bit never hurts. Increasing your credit score becomes very important if your score is within the lower range. Living with a low credit score can be difficult, especially if you plan on buying a home or any other major asset. Repairing a credit score takes time and discipline, but there are ways in which you can raise your score quickly. You won’t be able to get over bankruptcy or foreclosure overnight, but the higher you can get your credit score, the more chances you will have of being approved for a loan. Here are a few tips that can help you quickly improve your credit score.

Use Your Credit Cards in a Smart Way

Having too much debt can hurt your credit score. Using more than 30 percent of your credit limit on your credit card can actually lower your credit score, so it’s better to pay off the larger balance and use other cards with a low balance instead. Spreading the debt among several credit cards is also a good idea, as long as you remember that you can end up paying a larger interest rate.

Check Your Credit Report for Errors

You are entitled to one free credit report check per year, so take advantage of it and look over it closely in order to find any errors or misinformation. Credit reports are usually pretty accurate, but it’s always a good idea to check. Even a small error which may not seem too important can hurt your score and affect the interest rates that you will receive, or even your ability to take out a loan.

When checking your credit report for errors, make sure that you look for any erroneous information on your payment history and credit limits, missed or late payments that were actually made on time, and billing disputes that you have won. Notify the credit bureau about any error, no matter how small it may seem. The bureau will open an investigation and resolve the issue within 30 days.

Pay Off Larger Balances

Having too much debt will surely affect your credit score in a negative way. Getting rid of some of that debt is helpful, especially if you can pay off larger debts. Generally, it is better to access some savings or investments in order to pay off some debt and increase your credit score, than to get a mortgage loan with a low credit score and end up paying thousands more in interest.

Ask Your Creditors to Forgive You

Unless you and your creditors have had multiple incidents, or you have a really big negative spot on your credit report, you can simply ask your creditors to remove a negative item from your report. This will probably only work with minor items, but having several removed can really help your credit score. Remember that removing an item from your credit report usually works better right after the incident, and not months or years later.

Negotiate With Your Lenders and Creditors

If you are able to pay off some debt, but don’t want it to show on your credit report, you can negotiate with your creditors. Ask them not to report the unpaid debt in exchange for you paying it off. Getting their money is more important for creditors than hurting your credit score, so they will usually accept.

These tips will help you boost your credit quickly, but you won’t go from bad credit to good or perfect credit overnight. Repairing your credit will take a few years, but doing everything in your power to help it recover is very important. So start by checking your credit report for errors, come to an agreement with your creditors and pay off some of your debt, and you will be on the right path to repairing your credit score.

What is a Mortgage Credit Score?

Mortgage-Form1-150x150A new type of credit score, designed especially for mortgages, was released in 2012 by the Fair Isaac Corporation (FICO) in collaboration with data firm CoreLogic. This new type of credit score will serve as another tool that, together with the traditional FICO score, will help more people become eligible for a mortgage loan.

The FICO Mortgage Score Powered by CoreLogic will contain information that other credit bureaus, such as Equifax, Experian and TransUnion, don’t include in their credit reports. This should paint a complete picture of whether you are financially responsible or a risk for default. Information on your rent payments or child support payments will be included in this new credit report, and will be taken into consideration when determining your credit score.

Benefits of the Mortgage Credit Score

The developers of the new FICO Mortgage Score stated that its main purpose is to help more people become home owners, but critics say that it will only generate more inaccuracies and privacy problems. Some of the key benefits of this new credit scoring system are:

  • The mortgage credit score will help prospective home owners who don’t have a long payment history record, which is a large part of the traditional credit score. If you don’t have enough experience with other loans, such as credit card or car loans, then this new type of scoring can work in your favor.
  • Takes into account other on time payments. Nontraditional information, which wasn’t taken into consideration when determining your credit score in the traditional way, such as a payday loan that was repaid on time, can help you get a loan easier.
  • Recent events in the real estate market have made it harder for lenders to evaluate borrowers, so the new credit score will also benefit them by more accurately predicting mortgage risk. It is estimated that the FICO Mortgage Score can predict mortgage risk 7.5 percent more accurately than the old FICO credit score.

Disadvantages of the Mortgage Credit Score

As you are well aware, the traditional FICO credit scoring system comes with its pros and cons, and so does the new FICO Mortgage Score. Here are a few of its disadvantages:

  • Other issues will affect more heavily. Home buyers with problems, such as divorce, evictions, child support, or who bought a home before the economic crisis, will have a harder time getting a loan or rebuilding their credit, because the new credit score will accentuate their issues.
  • Unknown time frame for dispute resolution. It is unknown if consumers will have the ability to dispute and resolve any inaccurate information in their new credit report in a timely manner.
  • There is no guarantee that the new mortgage credit score will result in more loans being granted. Also, there are no guarantees that lenders will even use the new FICO Mortgage Score. Only smaller lenders have started using it, while big lenders are more concerned with sorting out loans with issues that they have already given out.

This new credit score may have benefits on paper, for now, but only time will tell if the new FICO Mortgage Credit Score will indeed help more people become home owners. The most important thing is for you to understand your financial situation, including your credit score, which can be the only thing standing between you and home ownership.

What Credit Score Do I Need to Qualify for a Mortgage?

Credit-150x150Buying a home through a mortgage loan involves many factors, one of the most important being your Fair Isaac Corporation (FICO) credit score. The credit score is a tool used by lenders to help them determine how much money they can lend to you and at what interest rates. Your credit score is included in a credit report, which is a history of all your loans and payments. As you have probably guessed, a good credit history means that your credit score will be high. If you have missed or late payments, that will lower your credit score and make you appear as a risk in the eyes of a lender.

What is a Credit Score?

The Fair Isaac Corporation (FICO) credit score is the most popular type of credit scoring system in the United States. Your credit score is a 3 digit number that is determined by using information in your credit report, such as payment history, amounts owed, and length of credit history. This number is used by lenders, such as banks or credit unions, as well as mobile phone companies, landlords, or insurance companies to determine if you qualify for their services.

There are three major credit agencies in the United States: Experian, TransUnion and Equifax. Each of these agencies use a slightly different algorithm to calculate your credit score, so checking with more than one of them is always a good idea.

You can get one free credit report per year by visiting AnnualCreditReport.com. Unfortunately, there is an extra fee involved in order to receive your credit score, as well. Credit reports might contain errors which will affect your credit score. You should always check your credit report for any erroneous data, and have it corrected by reporting it to the issuing credit agency.

Credit Score and Qualifying for a Mortgage

FICO credit scores range from 300 to 850. The higher the score, the lesser risk the lender is facing when granting you a loan. The lower the score, the more risk that you won’t receive the loan, or that you will approved with some pretty high rates. Not all lenders will require the same credit score to qualify for a certain loan, but you can use these score ranges to get a general idea:

  • No credit. Having no credit is a bad spot to be in when applying for a mortgage loan. You are seen as a high default risk by lenders, but the good news is that having no credit is actually better than having bad credit, because it allows you to qualify for loans designed for people with no credit.
  • Very bad credit. A credit score below 600 is considered very bad credit and it is, most likely, the worst situation you can find yourself in when deciding to become a home owner. It is very difficult to be approved for a mortgage loan without a co-signer or a very large down payment when having very bad credit.
  • Bad credit. A credit score in the 600 to 650 range is considered bad credit and, like in the case of very bad credit, it would be extremely hard for you to qualify for a mortgage loan.
  • Fair credit. You are seen as a moderate credit risk by your lender when you have a credit score in the 650 to 700 range. A fair credit will qualify you for fairly decent rates, but you won’t have access to any special packages or the best rates.
  • Good credit. A credit score between 700 and 750 is considered good credit and will allow you to qualify for better rates and terms.
  • Very good credit. People with credit scores in the 750 to 800 range are regarded as low risk by lenders, and will qualify for some of the best rates and options available.
  • Excellent credit. Someone with no negative data on their credit report, and a long and spotless credit history will have a credit score of over 800, and will have access to the best mortgage loan deals and rates available from most lenders.

Having a lower score can be frustrating, but credit score is ultimately your responsibility when you consider becoming a home owner. Improving your credit score takes time and patience, so prevention is the key. Making payments on time and not borrowing more than you can repay will ensure that, when the time comes to apply for a mortgage, your credit score will be favorable and you will receive a good deal, saving you lots of money.

How Your Credit Score Affects Your Mortgage

HOw-Credit-Scores-Work-150x150Most people come to a point in their lives when they decide to stop paying for rent or living with their parents; they decide to become home owners. Qualifying for a mortgage loan and receiving the best rates depends heavily on your credit score. Lenders will decide whether to lend you money or not, what type of mortgage you can apply for, and what your interest rates and fees will be based on your credit report. Understanding how your credit score affects a mortgage loan can save you thousands of dollars over the life of the loan.

How is Credit Score Determined?

The Fair Isaac Corporation (FICO) score is the most widely used scoring method. Some lenders may use other scoring methods, but FICO is the most popular. The FICO scale ranges from 300 to 850, with most people being in the 600 to 800 range. A credit score of 720 and above is considered a good credit score and it will be the most advantageous when shopping for a mortgage loan.

There are three major credit bureaus in the United States, Equifax, Experian, and TransUnion, and they each use a different scoring method: Equifax uses the BEACON method, Experian uses the Fair Isaac Risk Model, and TransUnion uses EMPIRICA scoring. That means that your credit score could vary from one credit bureau to another, because each method uses different algorithms.

Your credit score is determined by using data in your credit report, such as your payment history, debt owed, length of credit history, new credit, and types of credit used. Any negative information, like late payments, will lower your credit score, but positive info, like getting back on track with your monthly payments, will improve it.

Credit Score Effects on Your Mortgage

Lenders consider many factors, such as your employment status, your savings and salary, or your debt-to-income ratio, when considering giving out a loan. But the most important factor, the one who will have the most influence on what rates you will receive, is your credit score. Also, having a credit score below 620 will make it very hard for you to secure a mortgage. Let’s look at how various credit score ranges will affect your mortgage loan.

  • A credit score of under 620. This low credit score will make you fall into the subprime category. A few years ago, you could have qualified for a subprime mortgage with a credit score this low. A subprime mortgage featured high interest rates and not so great terms, but it was an option. Nowadays, very few lenders still offer subprime mortgages, and are very hard to find. A way out if you have a credit score lower than 620 is by making a large down payment, as large as 50 percent of the loan cost.
  • A credit score in the 620 to 760 range. Lenders will consider you credit worthy with a credit score in this range, but they will offer you their standard loan options, meaning you won’t receive any deals or special packages.
  • A credit score in the 760 to 850 range. This is considered top tier credit score and will yield the best mortgage deals. You will receive the best interest rates and the lenders will give you the most mortgage loan choices.

The most important part of your mortgage loan that the credit score will affect is the interest rate. You might not feel it as much month to month as you are making your payments, but even a small 1 percent difference in your interest rate can add up to thousands of dollars over the life of the loan.

Your credit score is used by lenders to predict your default risk. The more at risk you are, the more your mortgage will cost, so FICO scores are necessary in order to protect lenders. The good news is that you can improve your credit score, which will improve your mortgage terms, saving you money. Before applying for a mortgage loan, make sure that your credit score is in a favorable range. That will make your life much easier, and get you one step closer to your goal of becoming a home owner.

How a Mortgage May Hurt Your Credit Score

credit-fico-score-150x150Becoming a home owner is a dream come true for most people. Unfortunately, you will usually have to apply for a mortgage in order to become a home owner. Mortgage loans come with advantages and disadvantages. One of the main disadvantages is that your credit score may be damaged during the home buying process. To become eligible for a mortgage loan and receive the best rates from your lenders, you will have to make sure that your credit score is high enough. After you have bought a house with a mortgage loan, you may want to buy a car or apply for a new credit card. But that may prove more difficult than before, as a new mortgage could lower your credit score. There are three ways in which buying a home by taking out a mortgage loan can hurt your credit score.

Credit Score Inquiries

When applying for a mortgage loan, you will be scrutinized carefully by possible lenders. They will look at your employment status, your salary, your debt-to-income ratio and, most importantly, at your credit score. Your credit score will make the difference between receiving a low interest rate, a high interest rate, or no loan at all.

The lender verifies your credit score by pulling your credit report. The consequence of having your credit score checked by a lender is a drop of 5 or less points. These inquiries will also be added to your credit report, where they will remain for two years. Your credit score will decrease whether you were approved or rejected for the mortgage loan.

New Large Debt

A new mortgage loan will be added to your credit report as a new large debt, which will decrease your credit score significantly. Applying for a new loan or a credit card after you have taken out a mortgage loan will be difficult, as most lenders will consider you a bigger default risk.

The good news is that, even if this score drop will be quick and significant, your credit score will come back to its initial value within six months after taking out the loan, with the condition that your monthly payments are made on time, you keep your account balances low, and take out new loans only if it is absolutely necessary.

Late or Missed Monthly Payments

Repaying a mortgage loan is a big responsibility, and late payments can have a large negative impact on your credit score. Even worse, missing payments can result in losing your home to foreclosure, as has happened to many people in recent years.

Payment history represents 30 percent of your credit score, and a large part of your payment history is represented by your mortgage. Because the mortgage loan is such an important part of your payment history, even a couple of missed monthly payments can lead to a large decrease in your credit score.

You should know that, while a new mortgage loan may decrease your credit score, this is usually only temporary, and your credit score will recover or even increase after a few payments are made on time. So, in the long term, a mortgage will actually be beneficial to your credit score, provided that you make monthly payments on time and don’t miss any.

Mortgage loans and credit scores are closely related. It is your duty, as a prospective home buyer, to know and understand what your financial situation is, and act accordingly. Taking out an affordable mortgage loan and making payments on time will make the mortgage work to your benefit, and even increase your credit score over time.

Effect of Paying Off Your Mortgage on Your Credit Score

Credit-Score-150x150 (1)Your credit score is the most important factor when it comes to a mortgage loan. A low credit score can make your mortgage a lot more expensive than it needs to be, and can even prevent you from being granted a loan. Applying for a loan when you have a good credit score will guarantee you better deals from the lenders. A lower interest rate will make a huge difference over time, meaning that you will save money and make the overall cost of the mortgage loan much cheaper. But you should be aware that this goes the other way around, too. Your mortgage will actually affect your credit score both in a positive and negative way during and after the repayment period.

How a Mortgage Affects Your Credit Score

A mortgage loan is your best friend at the point in life when you decide to become a home owner. Unfortunately, there are many factors involved in the mortgage process that will influence how much money you are going to have to pay for your new home. There is a very close relation between your credit score and your mortgage and, before we talk about what effects paying off your mortgage loan has on your credit score, let’s see how a mortgage affects it from the beginning.

  • Even before you are granted a mortgage loan, your score will have to suffer a little. This slight decrease of maximum 5 points in your credit score happens because the lender that considers giving you a loan will have to pull your credit report in order to check if you are qualified for a loan. Each time your credit report is checked by a lender, your credit score is affected.
  • You will notice a credit score decrease immediately after you buy a home using a mortgage loan. This decrease might be significant, and it happens because your mortgage loan will be added to your credit report. A mortgage loan is regarded as a large debt, and it will lower your credit score. You might encounter difficulties if you plan on applying for a new loan or credit card right after you have been granted a mortgage loan, because most lenders will consider you a risk for default.
  • Six months after you are granted a mortgage loan and suffer the inevitable decrease in credit score, your score should bounce back to its original value. The only condition is that you make your monthly mortgage payments on time and don’t miss any.
  • Your new mortgage can also have a positive effect on your credit score. Being responsible and making your payments on time reflects positively on your credit score, and will increase it slowly over time.
  • If you stop making payments on time, or, even worse, if you stop making payments at all, your mortgage will have a large negative effect on your credit score. Your credit score could plummet by at least a hundred points in this case and you could go from a perfect credit score to a bad credit score in just a few weeks.

How Paying Off Your Mortgage Will Affect Your Credit Score

Whether the effect of paying off your mortgage will be positive or negative on your credit score depends on your individual circumstances. Your credit score may increase or decrease, but this effect will be minimal, and will be outweighed by the fact that you will be getting rid of your monthly mortgage payments. Another advantage of paying off your mortgage loan is that you won’t be running the risk of missing or being late with a payment anymore, which would put a large dent in your credit score.

Paying off your mortgage can increase your credit score if your ratio of available credit to what you have utilized is acceptable. Not using a lot of your available credit will put you in a favorable light, but the credit score increase will be a lot lower than if you paid off a credit card. It is actually recommended that you pay off your credit card loans before your mortgage loan, if you wish to increase your credit score. The positive effect that paying off your mortgage will have on your credit score will be minimal if your credit score is over 700, and insignificant if you have an excellent credit score, of over 760.

Paying off your mortgage can decrease your credit score in the case that your mortgage loan is the only type of installment loan that you have. FICO counts each variety of loans that you have as 10 percent, so your credit score will lose a few points if you pay off your only installment loan. This decrease will be minimal and can be countered by having a pristine payment history for a long period of time, or by taking out a new installment loan, such as a car loan.

Some experts believe that paying off a declining asset is not a good idea, and the money should be used to pay off other outstanding debts, such as credit cards. If, however, you have considered all your options and money is not an issue, then getting rid of those monthly payments might be a good idea. Paying off your mortgage will have a minimal effect on your credit score, so it should be a fairly easy decision to make.

The Foreclosure Process

foreclosure2-150x150Have you experienced financial difficulties to the point of not being able to make payments on your mortgage? These things happen, and while they are less than ideal, there are always solutions. Often times you will be given a grace period to try and sort through your payments. If this doesn’t work, a short-sale will probably be your next option.  Foreclosure will most likely be one of your last options- read on to learn what a foreclosure is and how it works.

What is a Foreclosure?

A foreclosure is the process by which a homeowner’s property rights are forfeited as a result of failing to pay the balance on a mortgage loan. A foreclosure is generally a last resort whose need arises when you are unable to short sell your house or pay the outstanding debt through any other means. Normally, it will be sold through a foreclosure auction. In case a sale isn’t made through the auction, the ownership of the home reverts to the lender.

When taking out a mortgage, the borrower signs a deed of trust that puts a lien on the acquired property. This makes the loan secured, so ownership can legally revert to the lender in case the borrower fails to make payments on the property on time. If a lender does not ask for any collateral, then this becomes an unsecured loan. The lender of an unsecured loan can take you to court in case of default but he cannot forcefully collect any money from you.

Most lenders prefer a secured loan because if you default on the payments, the lender can seize your property and recover the balance owed.

The Foreclosure Process

There are five major steps in the foreclosure process, including:

1.    Notice of missed payments

It is always expected that you make payments on time. However, the lender, in most cases, will allow a 10-day grace period. If you don’t make the payment after these 10 days then the lender will issue you with a notice of a missed payment. This notice asks you to send the payment ASAP to avoid legal action. If you happen to send the payment to the lender after issuance of this notice, then you may only suffer a penalty and negative feedback on your credit report.

2.    Notice of default

If you fail to make a payment for a period of more than 30 days, the lender will issue you with a notice of default. This is a silent way of telling you to pay up or a different action will follow. The notice of default includes information about the property, your name, the amount that you owe the lender, the number of days that have passed since the payment was due and a detailed statement outlining the terms and conditions of the mortgage that you signed with reference to payment timelines. Depending on the terms of the lender, the notice of default may explain that further measures will be taken if an action is not taken by the borrower. While some notices of default are friendly, others can be quite harsh. The most common action after a notice of default is a foreclosure.

3.    Foreclosure notice

A foreclosure notice follows if you don’t respond to the notice of default in a manner that convinces the lender you will pay. The foreclosure notice tells you that the bank is on the verge of initiating foreclosure proceedings. Depending on your location, you have 30-120 days to work a deal with the lender through a short sale. If the borrower pays off the balance on the mortgage then the foreclosure is dismissed. However, foreclosure commences if you fail to make the payments. The notice includes the amount due, the interest rate, the name of the lender and the contact information of the lender’s attorney.

4.    Auction

When the default has not been remedied at the end of the set timeline, the lender will proceed to sell your property through a foreclosure auction or a trustee sale. The auction can take place at the county courthouse, at a convention center, at the office of the trustee or at the scene of the property itself. The property is sold to the highest bidder at the fall of the hammer. Since many people don’t manage to pay cash on the spot, the bank and the highest bidder may enter a deed of lieu for foreclosure. In other cases, the lender may buy the property back.

5.    Post-foreclosure

If the auction is not successful then the ownership of the property reverts back to the lender. This is referred to as real estate owned or bank-owned property. Such properties can be sold either through a local real estate agent or in the open market. Other lenders may prefer to sell their property at liquidation auctions, convention centers, or in auction houses.

A foreclosure is a last-resort option only when all other of the other options have failed. It has the disadvantage of hurting your credit score for a period of at least 7 years and will make it difficult to deal with future mortgage loans. Be sure to exercise all of your options before resorting to a foreclosure. If you do end up with a foreclosure, stay positive as there is always light at the end of a tunnel. Your credit will eventually bounce back and you will be able to learn from the past and move ahead. Here are some other resources that may help you in periods during and after financial issues: Top 6 Mortgage Lenders for Borrowers with Bad Credit, Improve Your FICO Credit Score, and Top 10 Steps for Getting a Post-Bankruptcy Loan.