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.