With housing prices at historic lows, you may be one of the many people who are thinking about buying the home of their dreams in the not-too-distant future. But before you rush out and start scoping out houses in your ideal neighborhood, most real estate agents will advise you to seek out a potential mortgage lender (or two) and go through their pre-qualification process to determine your credit standing and how much mortgage you can afford.
Your credit rating is a critical component of the mortgage affordability calculation process. A credit or FICO (an acronym for the “Fair Isaac Corporation” which developed the formula) score is a complex mathematical formula that the three major credit reporting agencies (Equifax, Experian, and TransUnion) typically use to determine how creditworthy a person is based on information reported by a variety of sources, including current and prior lenders.
A credit score is used by a mortgage lender to help determine whether a person qualifies for a mortgage and if so, the amount of money that may be loaned.
Most credit reports gauge the risk a company might potentially face by lending a person money, and the likelihood that the borrower will actually make the payments in a timely manner over a specific period of time.
A person with a higher credit score generally presents less risk than a person with a lower credit score ― so a mortgage lender would be more inclined to lend a greater amount of money to the person with the higher score at a lower interest rate.
Credit and mortgages go hand-in-hand because the loan officer reviewing your mortgage application will be basing their approval on the information reported by others about you, including the amount of credit you have applied for in the past and how much outstanding credit you currently have.
If your credit score is low, the loan officer may feel that you are too much of a risk ― especially in the current economic climate, where thousands of people (even those with good credit scores) have defaulted on their mortgages.
So, if you are thinking about purchasing a home in the near future, one of the wisest things you can do is to obtain your credit report and review it carefully to ensure that the information provided about you is accurate and does not portray you as too much of a credit and mortgage loan risk.
You can request a free copy of your credit report once every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian, and TransUnion.