Be prepared to answer these questions.
When you apply for a mortgage, your potential lender is going to want a lot of information.
The lender's goal is to assess the likelihood that you'll default, or become unable to pay back what you borrowed. Mortgage lenders want to avoid loaning money to people who won't pay it back because foreclosure can be a burdensome process.
It's up to you to be prepared to put your lender's mind at ease.
That means understanding what lenders look at -- and having answers to questions that could affect your ability to get your loan approved. In particular, there are three big things your lender will probably want to know about your credit. Here's what they are.
1. What's your credit score?
Your credit score is one of the first things mortgage lenders look at. Lenders generally use your score as a shorthand way to assess your borrowing history and determine if you're someone they want to do business with.
If your score is good or excellent, they'll generally assume you've been responsible with credit in the past and will continue to be responsible with debt payoff once you get a mortgage.
But if your score is fairly low, this is a red flag suggesting that lending money to you may be riskier than they'd prefer.
2. Do you have a good reason for dings on your credit report?
If you have late payments, missed payments, judgments against you, or other negative records on your credit report, lenders may want an explanation before they approve a loan.
The more recent your derogatory marks, the bigger the problem they'll be when it comes to getting approved for a mortgage. But having a solid explanation -- such as a medical event that's since been resolved -- could make a difference in a lender's willingness to overlook past credit issues.
3. Can you explain recent inquiries on your credit history?
Lenders are interested not just in your history of paying your debt, but also in the amount of debt you've taken on recently. If you've borrowed a lot of money over the past few months, or even over the past few years, this can be a red flag to lenders. They may fear that you won't be able to continue paying all of the loans you've taken out.
When you apply for a new loan or credit card, you get an inquiry on your credit report, which will remain on your record for two years. When lenders check your credit, there's a chance they'll ask you about inquiries. They'll want to know if you ended up borrowing and what the loan was for.
If you have good credit -- and have a solid reason for any recent borrowing and past negative credit events -- you stand a better chance of being approved for a home loan. But if your score is lower, there's no good explanation for past credit problems, or you've borrowed a lot recently, you may have a difficult time getting approved. It might be best to work on your credit first so you're in the best shape possible when you apply for a mortgage.
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