You may have a high-paying job and a substantial amount of money saved for the down payment on your new home, but the credit and mortgage approval process has become much more rigid lately. Your credit history can actually determine the interest rate that you will have to pay on your mortgage loan.
With many lenders facing a multitude of foreclosures from borrowers previously thought of as reliable, the credit and mortgage approval process of today features nervous lenders who are less eager to part with their money. In turn, this means that credit is tight and borrowers have to be prepared to undergo a pretty rigorous credit and background check.
In determining what interest rate you qualify for, your mortgage lender will access your credit report from one (or more) of the three major credit reporting agencies. All of these agencies provide information about your payment history over the past twelve to twenty-four months, as well as any charge-offs, judgments, or bankruptcies over the past seven years. Additionally, any consistently late payments or under-payments you have made will be flagged. If these types of items appear on your credit report, they will reflect negatively on your ability to obtain a mortgage loan. Even if you are able to obtain a loan, chances are that your rate will be at the top of the interest rate scale.
You can search online for a list of mortgage rates and terms from several different lenders. While many of these rates are attractive, note that there’s usually a disclaimer at the bottom of the page stating that the “Rate/APR terms offered by advertisers may differ from those listed above based on the creditworthiness of the borrower and other differences between an individual loan and the loan criteria.”
In an online search, you’ll be asked to enter basic information about the amount of credit or mortgage you are applying for, the state in which you are purchasing the home, and the value of the property. You will also need to provide your credit rating as an initial basis for determining your proposed qualifying credit and mortgage amount. This will, of course, be verified before a final decision is made on the amount of credit extended to you and the mortgage interest rate on your loan.
In simple terms, if you have bad credit, you will pay a premium or penalty for it. On the other hand, if your payment history has been favorable and you are considered a low risk, you may be rewarded with a favorable interest rate on your mortgage loan.