The steps toward purchasing a home are an exciting endeavor, but sometimes it can get overwhelming. Typical home purchases are financed with assistance from lending entities. These lenders offer varying interest rates and timelines for loan repayment, and they determine these criteria based on a variety of factors including an individual's credit score, income, and ability to repay. In this blog post, we break down the reasons major lenders need to pull credit, and how it impacts the lending process.
For first-time homebuyers, exploring loan and mortgage financing options is essential. However, often, first-time homebuyers have not yet established substantial credit history. This is called "nontraditional" credit history. Nontraditional credit history isn't an absolute deterrent to obtaining a mortgage, but it may limit options. If you are looking to buy in the near future and find yourself in this category, you should look at started credit cards, and a personal loan from a local credit union just to establish tradelines that will help your credit score get established and grow. A healthy credit history inspires confidence in lenders and gives them information about how likely their loan is to be repaid without the hassle of collections. Many people choose to open a secured card or line of credit to bolster their credit scores and establish a more substantial credit history.
How Credit Score Impacts Mortgage Rates
Outside of credit history, another major contributing factor that lenders examine before initiating a mortgage loan is the individual credit score. A credit score is determined by a varying degree of components, such as the age of accounts, successful/timely payments, credit diversity, and balance-to-limit ratios. Generally, a lower credit score will alert lenders that the loan may not be repaid in a timely manner and decreases confidence. To counter this, most lenders will still offer a mortgage, but at a higher interest rate. A high credit score displays fiscal responsibility and inspires confidence. Consequently, homebuyers with higher credit scores will have a wider and more quality array of interest rate options. It always comes back to the risk that the lender takes, which will always require a higher rate to be paid. It is much like that in the insurance world as well. To get a lower rate, which will equal a lot of savings over the life of this loan and other loans you will have, you need to focus on getting the highest credit score you can.
How Credit Checks Impact the Homebuyer
Aside from the relationship between credit score, credit history, and mortgage options, there are additional details to be aware of when a lender needs to pull credit. If the credit check registers as a hard inquiry, it has the potential to temporarily lower your credit score. Unfortunately, this is necessary if you do want to apply for a mortgage. However, if you request your credit report, it will have no impact on your credit score. You can get a free copy of your credit report, from each bureau once per year. A credit report contains in-depth details from your credit history, and it is recommended that individuals order and thoroughly review their credit reports at least 6 months before beginning the process of buying a home.
Our seasoned loan officers at SouthPoint Financial strive to simplify the process of buying a home. We seek to educate potential home buyers while presenting all available options. Call and speak with one of our loan officers today. (888) 297-7227 or click below to apply online.
Written by: Patricia Eubanks, Vice President