Is This Your Situation: Shopping for Mortgage Financing for the First Time?
You’ve long dreamt of ditching the rental life and buying your own home. But you’re worried that blemishes on your credit report will scare mortgage lenders away.
Here’s some good news. It’s actually easier to qualify for a mortgage loan than you think. Even big financial missteps don’t have to prevent you from landing the mortgage financing you need to buy your home.
Of course, you will have to be prepared for some financial pain. If your credit reports—you have three, maintained by the three national credit bureaus of Equifax, Experian and TransUnion—do have late payments, missed payments or past bankruptcies, you’ll have to pay a higher interest rate. This is how lenders protect themselves; when they lend to riskier borrowers, they charge them higher rates as a safety net.
Here are some of the most common financial problems reported on credit reports, and how they’ll impact your chances to qualify for a mortgage.
Missed or late payments: Missed or late payments remain on your credit reports for seven years, and a single missed or late payment can send your three-digit FICO credit score tumbling by 100 points. The good news? If you don’t miss any more payments, pay down as much of your credit-card debt as possible and vow to never make any additional late payments, you can steadily rebuild your credit. It might take a while, but you can repair your credit score so that lenders will be willing to take a chance on you.
High credit card debt: Lenders get nervous when they see that you’ve built up a mountain of debt. If you are saddled with thousands of dollars of credit-card debt, these lenders will charge you higher interest rates. Here’s the good news: most lenders will still approve you for a loan, if your credit-card debt doesn’t push your debt-to-income ratio past 43 percent (Lenders prefer that your monthly debts, including your estimated monthly mortgage payments, equal no more than 43 percent of your gross monthly income). They will, though, charge higher interest rates if your debt levels are too high. Pay down as much of your credit-card debt, then, before you apply for a mortgage.
Foreclosure and bankruptcies: Foreclosures and bankruptcies are the most devastating black marks that can show up on your credit reports. But even they won’t keep you from ever qualifying for a mortgage. Foreclosures will stay on your credit report for seven years and drop your credit score by more than 100 points. A Chapter 13 bankruptcy filing will remain on your credit report for seven years, while a Chapter 7 filing will stay there for 10. Both will drop your FICO score by more than 100 points, too. You will have to wait before applying for a loan after either foreclosure or bankruptcy, usually at least seven years but sometimes as little as three. While you’re waiting, work on establishing a new history of paying your bills on time and cutting down your debt. That way, your credit score will be solid when you can apply again for a mortgage.
Contact me today to discuss your individual needs, and together we will get you on your way to homeownership.