How A Positive Credit History Affects A Mortgage

Your credit history can affect the interest rates and mortgage terms that lenders offer you. A good credit history can even help you overcome weaknesses in other aspects of your mortgage loan application. The following information will help you understand what your credit history is and the role it plays in getting the best mortgage you can.

Credit History and Credit Score

All borrowing you do is reported to the three main credit reporting bureaus, Esperian, Equifax and TransUnion. Every aspect of borrowing is added to your history, including loans you take out, credit cards taken out, credit card accounts closed and even automatic overdraft accounts. Any negative information such as late payments, charge offs, default or items turned over to collection agencies also are there and stay on your history for seven years. A bankruptcy stays on your history for 10 years.

Using a proprietary equation, the Fair Isaac Corp. uses your credit history to determine a credit score for you which is called your FICO score. It ranges between 300 and 800, with the median American score at about 720.

Your History and Interest Rates

When determining what interest rate to offer you on a mortgage your credit history plays a major role for the lender. They will look at your debt-to-income ratio and your mortgage-to-income ration. They will evaluate the amount of the loan compared to the value of the home you want to buy. The will pull a credit history report on you.

If your credit history generates a score above 760 you will get the best rate a lender can offer, if other aspects of your application warrant it. With a score below 620, you will be classified as a subprime borrower and be offered rates about 3 points higher than the best customers.

Your History, Your Home and Your Income

Lenders base interest rates and loan terms on the risk they believe you represent. The less risk, the better the terms. A good credit history can improve your chances of getting your mortgage application approved even if your debt-to-income ratio might not support it. Lenders like to see a mortgage payment account for about 28 percent of your gross monthly income. But they have leeway. If you have a solid credit history, they can take that into account.

Knowing Your History

If you know your credit history in advance of approaching a lender, you have strengthened your position in the application process. You know what they know.

You are entitled to one free credit report each year and can get it from any of the three credit reporting bureaus. You should apply for the free report about six months before planning to approach a lender. This gives you time to look for mistakes on the report - about 60 million people have mistaken reports - and appeal the error to the credit bureau.

Rewriting Your History

Just as good credit history can help you get the best mortgage rates and terms available to you, bad credit history drags you down. There is no quick fix for repairing credit history if your credit report is accurate. You must have good financial practices over time and wait for the negatives to fall off.

But if there are mistakes and you can document them, the credit bureaus are required to receive them, investigate them and, if warranted, rewrite your credit history.