For this part of the “Improving Your Credit Score To Buy A House” series, we will be talking about how mortgages look at your credit history, current balances, and other credit factors to determine your borrower risk. While these aren’t necessarily credit score tips, this can offer a different perspective to help understand why keeping and maintaining a good credit score is important!
- 1 Minute | No Hard Credit Check
What is Borrower Risk?
Mortgage lenders will determine how risky it is to lend a borrower money. This is called borrower risk. When you have a cleaner credit history and higher credit score, you have less borrower risk. As a way to counter borrower risk, mortgage lenders will increase the interest rate on a loan if that loan is approved.
This means that you will be paying more money every month than someone else who took out a mortgage for the same amount you did, but has less borrower risk due to a better credit history and score. And in some cases, you may need to pay a borrower risk premium in order to close the loan that operates separate from interest rates.
Why Are Mortgage Lenders Concerned With High Credit Card Utilization?
The short answer is because you will then be a high risk borrower. If we ignore the fact that you’re applying for a mortgage for a second, what does high credit card utilization tell us? Most lending companies will look at your utilization and wonder why it’s so high.
“Is this perspective borrower unable to pay down these credit cards due to the interest rates? Are they currently under water with debt and unable to pay more than the minimum payment? Are these high utilization rates signifying that this borrower is actually irresponsible?” And this ultimately leads to the biggest question of all: “Will this borrower be able to make OUR payments?”
There are tons of questions that lead into red flags when lenders look at high credit card utilization. While you may have needed to use most of your credit card balance to cover an emergency expense, if you do not pay most of that back down, this can make you look like an irresponsible spender.
- 1 Minute | No Hard Credit Check
Mortgage Lenders Care About Your Credit History Too
One of the bigger indicators of how someone will act is how they have acted in the past. This is the same case for people with questionable credit histories. If you’re someone who repeatedly has late payments, this will be a huge red flag for mortgage lenders.
Now, this is not to say that there isn’t a way to still get a home loan if you’ve made some mistakes, but your credit score and history will reflect that history. For most loan programs, lenders will allow you to make a letter of explanation for any derogatory accounts or collections that have happened. When they receive your letter of explanation, they will then determine if those credit history mistakes were out of your control or if you may become a repeat offender.
If they feel that you have made the necessary adjustments to prevent any further mishaps from hitting your credit history, they may still approve the loan. This means that if you’ve had a bankruptcy or foreclosure in your history, and a specified amount of time has passed, you can still get a new home loan!
