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YOUR CREDIT SCORE AND YOUR MORTGAGEHow Your Credit Score Affects Your Mortgage
Each year thousands of prospective homeowners are shocked to
discover their credit history will keep them from the dream of owning a
home. While it seems surprising that an individual could know so
little about their own credit score, the truth is that far too many
consumers go carelessly through life, unconcerned about how their
financial actions may effect their future plans. While consumers may be
aware of a few negative marks on their credit score, they do not
realize the full impact of their actions and the adverse effects they
may have until they are denied a loan.
If asked what they thought their credit score would be, consumers
generally respond by saying they believe their credit score to be fair
or good. In reality those afore mentioned consumers have no idea what
their credit score truly is because they have failed to take the time
to investigate their credit history or to research the grading system
for excellent, good, fair or poor credit ratings.
Each of the three credit reporting agencies uses their own
standards and formulas that calculate a consumer’s credit score. Below
is a breakdown of what it takes to hit each benchmark on a credit
report.
To have an excellent credit rating you can have no late payments,
no collection notices and no bankruptcies or repossessions. A good
credit rating may only contain one late payment within the last two
years. In order to receive a fair credit rating you can have more than
one late payment may not have a bankruptcy or repossession in the last
two to three years. A Poor credit rating contains recent collection
attempts, late payments within the last year, and bankruptcies and/or
repossessions within the last two to three years.
Your credit rating can have a devastating effect on a consumer’s
life because it can be the deciding factor in whether or not you are
approved for a loan and what your interest rate will be. Even when a
consumer is approved for a loan, if their credit is less than
excellent, they will find themselves paying far more in interest than
consumers with outstanding credit history. This is because lenders
determine the interest rates offered to consumers based on how much
risk the borrower presents.
Individuals with less than perfect credit traditionally present
more of a risk of defaulting on their loan. Lenders are able to
justify charging a higher rate of interest to these consumers. The
extra interest earned on the loan is intended to compensate the lending
agency if the consumer were to default on the loan. Since most
mortgages are set up over a period of 15 to 30 years, these consumers
are losing an astonishing amount of money.
Right now you might be thinking if I default on the loan, can’t the
lender take back the property, sell it and still recoup their money?
While technically, this is true; a repossession will only occur after
the lender has spent a significant amount of money trying to collect a
payment from the borrower as well as whatever various legal fees may be
involved in forcing a repossession. The money gathered from the
inflated interest helps to alleviate the out of pocket expenses paid by
lenders who have to force collection and repossession on consumers.
In addition to higher interest rates, consumers with negative marks
on their credit may find that banks are not as willing to finance the
entire purchase and they may be required to come up with a large down
payment. Again, this relates to the subject of risk. A lender would
rather reduce their risk by having the borrower fund a larger
percentage of the purchase. Banks that would otherwise finance almost
100% of a home purchase will suddenly drop their offer to 80% or 90%
when a credit check reveals a poor credit rating. Unfortunately, in
some circumstances, the extra money required on the down payment
prevents consumers, already strapped for cash, from buying a home.
The best way to combat the negative impacts of your credit score is
to constantly be vigilant. Pay bills on time, constantly monitor your
debt load and don’t shift money around from one account to another.
Make a habit of saving all receipts in case you have a reason dispute
the information recorded on your credit. Staying on top of your credit
history by running a credit check once a year will help you discover
problems while they are still fixable not when you’re sitting in front
of the loan officer.
To make this process easier for consumers the three nationwide
consumer reporting agencies have launched a central website, toll-free
number, and mailing address where you may order you free annual
reports. The companies are only providing the free reports through www.annualcreditreport.com,
877-322-8228, and Annual Credit Report Service, P.O. Box 105281,
Atlanta, GA 30348-5281. Through these central locations you may order
your reports from all three of the reporting companies at the same
time, or you can order from just one or two. The law allows you to
receive one free copy from each of the three agencies every 12 months.
If you find out your credit is less than perfect and would like
options on how to get your financial life back on track, call us today
to discuss how we can reduce your debts. To receive your free
consultation please fill out the form on the right or call us toll free
at 866-559-3328 and inquire about our debt solution. Become debt free today! |
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Professionaldebtadvisors.com - 2008
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