Best Rate Mortgage Loan

Good Credit Home Loans

Consumers looking to obtain credit or finance will generally find that a bank or lender will initially want to find out more about their creditworthiness. This will typically involve looking through an individual’s credit report and credit score. A person’s credit report will contain financial information about their various credit accounts, payment history, and any bad debts, defaults or judgements registered against them.

This information is then formulated into a credit score. Credit scores will range from a minimum of 300 up to a maximum of 850, whereby a score of 700 and above is considered good credit, and a score of lower than 550 is bad credit. A lender will offer various credit accounts with specific terms and rates based against this credit score.

One such form of credit could be a home loan, which is typically obtained to allow someone to own their own home. Property is likely to be one of the most expensive purchases that a person will make in their lifetime, and this is the exact reason why there is a wide range of home lending products available in the market. These range from mortgages, second mortgages, home improvement loans, home equity loans and home equity lines of credit.

As mentioned, the terms and rates that will be offered with a home loan will very depend on a person’s credit score. However, an individual with good credit can expect to be offered the best interest rates, and some very favorable terms on their home loan. This in turn will typically mean that a person will pay far less interest on their mortgage and will have far more flexibility with their mortgage product.

Good credit will also offer a potential borrower far more choice when looking for a home loan. A bank will lend money on a risk-based basis, which basically means that if they believe an individual is viewed as a good risk they will be able to borrow more money and at the cheapest interest rates. Therefore, a borrower with good credit can expect many lenders to be interested in doing business with them.

Good credit may also allow someone looking for a home loan to borrow over 80% of their property’s value, without the need to pay mortgage insurance. Mortgage insurance is typically charged on loans over this size to protect the lender against the possibility of a borrower defaulting on their loan. This will generally increase the size of loan required, and thus will increase the monthly payments.

Another benefit for a borrower with good credit looking to obtain a home loan is that they may not be required to supply as much documentary evidence in order to be approved. Lenders will typically want to know about a borrower’s employment, residential and overall financial history. This may involve providing paychecks, bank statements, previous mortgage statements, savings accounts records, W-2s, credit card bills, loan statements, etc.

However, if a lender is satisfied that a potential borrower has good credit, they may not be required to provide any documents at all. This, of course, will save both the borrower and lender a lot of time, and will typically see someone being approved a lot quicker, and thus being able to move into their new home much faster.

In order for consumers to improve their credit score and be considered as someone who has good credit, they should:

  • Pay their mortgage or rent on time and not have been late for over 2 years.
  • Ensure that their car loan payments are always made on time and that they haven’t been late in over 2 years.
  • Pay credit card bills on time, and generally pay more than the minimum payment, and they haven’t been over 30 days late more than twice in the preceding 2 years.
  • Have no outstanding collections or judgements registered against them in the last 2 years.
  • Ensure that their current home loan or mortgage payments do not exceed 30% of their gross monthly income.
  • Ensure that their total payments for credit per month, which includes all loans, credit cards, mortgages and credit accounts, does not exceed more than 40% of their gross monthly income.

Home loans will typically run for a long time, and most mortgage products are generally offered for a 15 year or 30 year term. Therefore, the better credit rating someone has, the less expensive they can expect this long term commitment to be. The difference between good and bad credit for someone looking for a home loan can be as much as 2%-3% in interest points on the loan. If we consider that this will cost a borrower $2,000-$3,000 extra per year in mortgage interest on a $100,000 home loan, it’s easy to see why having good credit is so desirable.

Related Information