Applying For a Mortgage? Know How Your Credit Score Can Help (or Hurt)

With more than a decade of experience in the mortgage business, Jen Davis has seen clients fitting just about every profile. The manager of Cornerstone Funding, says for potential borrowers who have low or no credit, the biggest impediment to securing a home loan isn’t actually concern over their credit score.

“The biggest obstacle is that most people are so afraid of their credit that they won’t even walk through the door. A lot of people think that their credit is much worse than it really is, or is too low to qualify for a home loan,” Davis told the Poughkeepsie Journal.

“Once you come and sit down, things usually don’t look so bad. For most people, we can work with their credit to find a program or loan product which will work for them.”

According to Davis, many of the same options that are available for other clients can be modified to fit the needs of a client with bad credit.

Like many other mortgage brokers, Davis says the ideal borrower in today’s market is someone with good credit, a reliable source of income and 20 percent of the price saved to use as a down payment.

But that ideal is becoming increasingly less likely.

“That doesn’t mean you have to fit that exact profile to find financing for your home. And many people don’t. People just don’t have the money in the bank or the understanding of the importance of credit,” Davis said.

“We have standard 30- and 40-year mortgages that we can do for clients with low credit, some lenders are even coming out with 50-year home loans. An ARM, or adjustable rate mortgage, is a popular plan to help people find the lowest rate possible.”

Prospective bad credit mortgage applicants may also be able to qualify for 100 percent financing.

“Another possibility is an 80/20 program where there are actually two loans — one for 80 percent of the cost and another for the additional 20 percent. The first loan is at the lowest rate possible, and the second is to cover the down payment. It’s two loans, but essentially 100 percent financing,” Davis said.

Davis said that kind of New York home loan can be refinanced in only a few years, again to help the borrower to secure the most reliable and feasible program to meet their individual needs. Refinancing is common for clients who need to give special consideration to their credit status.

While a potential borrower who has bad credit may qualify for a number of specialty mortgage products, qualifying for a mortgage doesn’t mean that person should accept it.

The New York State Banking Department recently turned its attention toward ways to promote better awareness of the mortgage products on the market and what the potential benefits and drawbacks are of those products. Potential borrowers with or without bad credit shouldn’t be afraid to ask questions — particularly if their profile falls into a less than ideal category.

When you are considering a mortgage plan, you don’t want to think about the worst case scenario, but according to Liz Billet, press secretary for the Banking Department, that might be the safest course of action.

“What is the most expensive that the loan is potentially going to be for you? That is ultimately what you want to know,” Billet said.

When dealing with adjustable rates and refinance packages, those figures may not be as clear cut, which is why asking specific and direct questions is so important. Don’t ever accept “don’t worry about it” or “that’s not going to happen for a long time.” If a mortgage broker isn’t willing to give you a specific financial answer, shop around.

And whatever you do, understand the importance of your credit score. That magic number reflects late payments on accounts, the length of time your credit has been established, the amount of credit on which you’ve borrowed as compared to the amount available, employment history, and any negative credit information such as bankruptcies and collections.

Credit scores are extremely important for potential home buyers, but also can affect a your ability to qualify to rent an apartment, your credit card and auto loan interest rate and what kind of deposit you will pay when setting up basic utility services such as telephone and electricity.

A higher credit score generally translates to a better mortgage rates for a home or other type of loan, which can mean a wider variety of options and a lower monthly payment. If your credit score and financial situation overall are not up to par, waiting to buy a home might be the best answer.