Your Credit History

When you are shopping for a loan the interest rate that a lender uses to entice you is not necessarily the interest rate that you will end up paying. In fact, depending on your credit score, the interest rate that you are finally asked to pay could be considerably more than what you were planning.

The best rates and terms are reserved for borrowers with the best credit. Borrowers with flawless credit histories are referred to as prime borrowers and borrowers with less-than-perfect credit are known as sub-prime borrowers. No matter which category you fall under there are lenders who will make you a home loan – the difference is the rate and the terms that you will be able to get.

That is why your credit history is important and why you should be very careful to keep your credit history as clean as possible. Before approaching any lender there are a few things you should do. First, make certain that all of your loans are current. By this, we mean, be certain that you are not behind in any payments.

Pay off and cancel all but one or two credit cards. If you need to get a debt consolidation loan to pay off your credit cards and get all of your accounts up-to-date it is better to do so than to approach a lender with a pocketful of late credit card payments and maxed out cards.

Again, cancel all but a maximum of two of your major credit cards. It doesn’t matter if you have a balance on the cards or not. It doesn’t matter if you have ever used the cards or not. That’s not what the lender will look at. The lender will look at a multitude of credit lines, i.e., whether you have used them or not, whether they are all current or not, and the lender will assume that at some time in the future you will max out all of your credit lines and then how will you make your mortgage payment AND make all of your credit card payments?

Having poor credit can increase the amount you will pay for your mortgage by as much as two percentage points, it can increase the number of “points,” pre-paid interest, you’ll have to pay and it can increase the amount of down payment you will be required to make.