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Health & Fitness

How Does Your Credit Standing Affect a Home Purchase?

It's no surprise that there is a rising awareness regarding credit standing. One of them most important purchases most people will ever make – a new home – hinges largely on being able to prove a good credit history, which essentially marks a prospective home buyer as a good risk for mortgage financing.

What is credit?
So, what does the term credit really mean? In essence, if you have borrowed money and paid it back over time, in most cases with interest charged over the life of the loan, you have credit. Examples of this type of loan would be student loans, car loans, or credit cards. Failing to make timely payments on any loan you hold can result in poor credit. 

What factors can affect my credit rating?In addition to late loan payments, a failure to make any other monthly payments that you owe – such as your credit cards   – can also have a negative impact on your credit standing, even more so if any outstanding payments have ever been referred to a collection agency. 

In addition to your payment history, your credit rating is based on the total amount of debt you already hold through loans or credit cards, the length of your credit history, your credit management (whether you keep balances low on credit cards and make timely payments), and how often you have applied for additional credit, which can be assessed by examining how many inquiries have been made into your credit. Applying for multiple credit card or retail accounts at once, for example, could have a negative impact on your overall credit. 

Your credit history will also reflect any bankruptcies you have declared.

How can my credit affect a home purchase?
Mortgage lenders want the assurance that you are a good risk for financing. Particularly now, when the market has seen an abundance of foreclosures on homes that buyers simply couldn't afford to pay off, lenders are taking a close look at applicants' credit histories. If you have poor credit, you may find it difficult to obtain financing or at a minimum pay a higher interest rate due to the poor rating.

Even if a lender agrees to extend financing to you, any blemishes on your credit record can lower your credit score and result in a less attractive interest rate when you apply for a mortgage loan. Since most mortgage loans are amortized over 15 or 30 years, a higher interest rate can mean spending more money on every monthly payment, which can add up to a lot over the entire lifetime of the loan. 

How is credit measured?
There are three major credit reporting bureaus that keep track of consumer credit by assigning you a credit score – a number between 300 and 850 – based on your credit history. Consumers can petition to view a free credit report statement that includes information from all three agencies once a year. Each of the three agencies – TransUnion, Equifax, and Experian – should have similar numbers. If there is a large discrepancy among them, you would be wise to investigate and see whether there is an error on one of the reports. If there is, make an inquiry to the agency in question.

Credit scores range from 300 to 850. Scores of 760 and above are considered very good. Scores above 680 are considered good. While a score lower than 680 may signify that you might have difficulty obtaining a loan or qualify only for a loan with a higher interest rate.

What's the bottom line?
Being aware of your credit standing and having knowledge of your current credit scores will help you and a professional Loan Officer determine if you can qualify for an attractive mortgage rate. By talking to a Loan Officer before you start the home buying process, you should be able to eliminate any major surprises when you decide to apply for a loan. And by keeping a close eye on your credit even when aren't currently looking to buy, you'll be in good shape when you decide to purchase a new home.

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