The interest rate on your mortgage is of critical importance in determining how much money you will actually pay throughout the term of your loan. The difference between a percentage point, or even half a percentage point, on a few hundred thousand dollars over a 30-year mortgage term can add up to a lot of money.
If you have excellent credit, you may be eligible for a low interest mortgage loan that can end up saving you thousands of dollars. Conversely, if your credit is poor, there is a strong likelihood in that your request for a mortgage loan may be denied. Even if you are able to obtain a mortgage loan with bad credit, you may be stuck paying a high interest rate that can make your combined principal and interest payments a real burden.
Your credit rating is a matter of great importance to the loan officer responsible for deciding how much (if any) money to lend to you. Keep in mind that a mortgage is usually the single largest debt that a person will incur in their lifetime, and it is a long-term commitment. Good or bad credit and low or high mortgage interest rates are closely correlated, and a percentage point difference can result in either a savings or an increase of a great deal of money over the life of the mortgage.
FICO scores range from between 300 and 850. Although a mortgage lender will look at other things (such as your current length of employment, salary, and expenses) in determining how much credit to extend to you, your credit rating provides a good place for them to start the evaluation process. If you have bad credit and your FICO score is at the middle or lower end of the spectrum, you could end up paying a higher interest rate ― or even worse, your credit and mortgage search could come to an abrupt end.
The credit review and mortgage approval process will start with your potential lender obtaining a copy of your credit report, for which you will typically be assessed a fee. The mortgage lender will review your personal information ― including current and prior employment history, social security number, address, phone number, and date of birth, among other things.
You should ensure that any incorrect information is updated prior to the mortgage lending reviewing your credit report. The mortgage lender will analyze your credit history ― which includes current and prior lenders’ names, account number(s), a description of the account(s), the date accounts were opened, high balance amounts, outstanding balances, loan terms, your payment history, and the current status of your account(s).
The credit and mortgage loan process can be a much more positive experience if you take steps to pay-down any outstanding credit card balances or revolving loan balances. You should also remove any inaccurate information from your credit report and ensure that your bills are paid on time prior to applying for credit or a mortgage.