Month: November 2011

Your credit score can affect your ability to get a mortgage. Mortgage professionals rely on such scores to assess whether you’re a candidate for a loan.

A credit score is more or less a rating of how a person is able to manage the credit that he or she has available.

Creditors, such as credit card companies and the like, report information such as payment history to credit bureaus, the primary ones being TransUnion, Experian and Equifax.

When your mortgage professional pulls your credit, he or she will receive information from all three bureaus. The middle score of the three will be used to determine the credit score that will be used by your lender.

All three bureaus have scoring models, which take many factors into consideration when determining a score for you. The scoring models are similar from bureau to bureau, but individual scores may vary depending on what information they have when your report is run. The most significant of these are recent payment history and how much debt you have in relation to how much credit you have available to you.

Recent payment history is significant in that if you’re having challenges keeping up with your current debt in a timely fashion, adding more debt to the mix, as in a mortgage, will draw attention from lenders.

Balance-to-limit ratios on your revolving debt, as in credit cards, are indicators of how well you manage the credit that’s available. Having multiple cards that are close to their maximum limits may indicate that you are overextended. Keeping your balances low keeps your credit scores higher.

Buyers need to think about many things when considering the purchase of a home.

Financing, of course, is one of the most important items.

To determine whether you qualify for financing, lenders look at something called debt ratio.

The debt ratio often determines whether or not a buyer can qualify for a mortgage.

Calculating the debt you carry is based on a number of things.

There are different kinds of debt.

For conventional and Federal Housing Administration loans, lenders look at revolving and installment debt.

Revolving debt includes mostly credit cards and other types of debt, where monthly balances can fluctuate as they are paid down then increased as the line is accessed.

Home equity loans are calculated as if the balance is as high as it can go.

Installment debt includes any kind of fixed-payment obligation, such as an automobile loan, where the interest rate and payment amounts are fixed for the life of the loan, which has a specific end date.

Installment loans with fewer than 10 remaining payments will be excluded from debt ratios, so if you are close to having that car paid off, it need not be a factor in your debt calculations.

Items such as utility bills, food, clothing and gas for the car are excluded from debt ratios.

Student loans are another thing lenders consider.

Often, student loan payments are deferred until the student graduates.

Even when payments are showing as deferred on a credit report, lenders can and often do use them in the calculation of debt ratios.

This will help the lender get an accurate picture of what the debt profile will look like at some point in the future.