How does credit affect buying & refinancing?

How does credit affect Buying and Refinancing?

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What do lenders look for?

There are several ways you can improve your chances of qualifying for a home loan. By knowing exactly what lenders look for and presenting yourself accordingly, you may be able to receive a better credit rate. Typically, when you first apply for a loan, your lender will review your credit risk based on several factors. These factors include your income, credit history, and overall financial stability.

Credit History

Your credit history can largely determine what types of credit you are able to qualify for. They consider this especially relevant because it is a record of your ability to manage credit over time. If you’ve never seen your credit report, it is essentially a list of lenders that have extended credit to you. Although some information often varies from one credit reporting agency to another, the reports all include similar information regarding the names of your lenders, your payment history, and the type of credit you received.

In addition to your credit report, your credit score is also reviewed by potential lenders. Based on the information in your credit report, your credit score is typically a numeric value between 300 and 850. For the lender, it serves as an risk indicator. For the most part, the higher the score, the lower the risk.

“Your credit report is a detailed list of your credit history, consisting of information provided by lenders that have extended credit to you.”

Capacity

In order to minimize risk, lenders need to know whether or not you can consistently manage your payments. You capacity essentially refers to your ability to generate income. Consequently, lenders use your past income and employment history to measure your ability to make regular payments. Lenders may also consider your debt to income ratio, based on the ratio of your overall debt as compared to your before-tax income.

Collateral

If you keep you home properly maintained, you can potentially increase its value. The overall value of your home as compared to the amount that you are paying for it is known as the Loan to Value Ratio. The higher the Loan to Value ratio, the better. Presenting other physical assets besides your house can also improve changes of getting a loan.

Capital

Any additional capital that you have in savings, investments or other assets improves your ability to make payments and therefore is considered by lenders. In the event that you lose a primary source of income, additional capital shows the lender that you would still be able to make payments.

Conditions

Often lenders want to know how the loan amount will be allocated and if your purchase has been properly budgeted. They also want to be aware of any other circumstances which may affect your ability to repay the loan.