Mortgages: 2 Rules for a Healthy Credit Score

With all the changes that have been going on with home financing over the last few years, none needs more attention by homeowners and would-be homeowners at this point in time than the subject of credit.

Historically, income, assets and credit were the determining factors in whether a potential borrower was approved for a mortgage. In the recent and fairly recent times of low- and no-documentation loans, lenders got away from that, and that, in part, contributed to the current situation we are now in. That being the case, lenders are analyzing mountains of data from mortgages taken out in recent years and have come to the conclusion that borrowers with higher credit scores, regardless of income and assets, are less likely to default on their mortgages.

What this means for buyers is that keeping credit as well-managed as possible should be a priority, whether or not buyers are looking for a home. Below are two of the major contributing factors that make up a credit score:

  • Balances Versus Limits: Keeping balances as low as possible, ideally under 30% to 40% of the limit on a credit card and other trade lines, will help keep scores high. Having a balance that is very close to the limit will cause scores to drop – but less than they would if the balance were over the limit.
  • Recent History: Having made payments on time over the last 12 to 24 months will give the lender an indication of a buyer’s payment habits and let the lender know how likely the buyer is to make payments after taking on a mortgage.

How to Find the Best Mortgage for You Today

Finding a mortgage these days, despite all the negative economic news we are hearing in the media, is easier than it has ever been.

Before you take the leap, though, there are a few things you should think about.

The first question that you might want to ask yourself is how long you intend to occupy the property.

Fixed or adjustable?

If you’re reasonably sure that you are going to be there for the short term, an adjustable-rate mortgage might be something worth looking into.

If you are unsure, consider going with a  fixed-rate mortgage.

The reasons for this are twofold.

First, you protect yourself against rate increases that an adjustable-rate mortgage would have.

Second, if you do wind up staying and want to refinance into a fixed-rate loan, chances are that the rate will be higher than it is now in early 2010.

Rates have been at record lows for a long period of time.

When the economy turns around, and it eventually will, both fixed and adjustable rates will increase.

Comparing mortgages

These days, mortgage disclosure laws for brokers and banks alike continue to get more stringent, with the best interest of the consumer in mind.

As a result, you are now truly able to compare apples to apples.

You should take the time to talk to different lenders and see what they have to offer, and then compare their documents to see which one really is offering the best deal.

It’s also important to understand what’s best for you in the long term.

If you’re planning to stay in the property for an extended period of time, say, 20 years or more, ask how getting a lower rate would benefit you, even if you have to pay more in fees to get it.

A savings of even $30 per month over 20 years will amount to $7,200.