Credit Scores and Getting a Mortgage: What Your Score Means for Your Options

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When an individual approaches a lender about securing a mortgage, one of the factors that will be considered is the applicant’s credit score. Even with lenders who consider a variety of factors before making a decision about the application, the score will still have some significance. Here are some of the ways that the current score will impact the options available for financing the purchase of a home or securing a second mortgage.

Understanding the Function of a Credit Score

Credit scores are essentially ratings that provide insight into the ability of the individual to take on additional debt and manage it responsibly. There are a number of factors that influence the score assigned by a credit bureau. One has to do with the amount of debt the individual already has in comparison to the average income generated each month. Past issues such as slow payments, defaulting on loans, or filing for bankruptcy also have some influence on the score. Depending on what has taken place in the past, the impact on the credit score can remain for years.

How Does the Score Related to Securing a Mortgage?

All lenders will pull at least one and possibly more credit reports as part of the evaluation of any mortgage application. Even lenders who offer bad credit mortgages will pull credit reports and review the scores. Those scores will make a difference in two specific ways.

One way that the score impacts the situation is determining if the lender is willing to approve the application at all. It’s not unusual for lenders to only consider applicants who have a cumulative score over a certain amount. Anyone who is below that number will find the application is rejected as a matter of course.

Assuming the applicant does meet the minimum requirements in terms of the credit score, the lender will move on to determining what rates and terms will be offered to the individual. A higher score coupled with a lower debt to income ratio will result in being offered a lower rate of interest and possibly more competitive terms. If the score is barely over the minimum required by the lender, the interest rate will be higher, and there could be more provisions for fees and other charges.

There Are Still Choices

A low credit score does not necessarily mean that no one will work with the applicant. There are lenders who will work with people who have past credit problems but have sufficient income to cover the mortgage payments. While a poor credit mortgage as either a first or second mortgage Caledon may mean higher interest rates for now, there is the option of refinancing later on when the credit score is higher.

Remember that securing a mortgage and making payments on time will help to improve the credit score over time. Between the positive reports on the timely payments and the fact that older information will be removed from the credit reports after several years, the debtor could see a significant difference in the credit score sooner rather than later.

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