How Previous Credit History Impacts a Mortgage Loan Decision

Loan decisions are based on several factors, but few are quite as important as your previous credit history. This is true with mortgage loans. While in the past, you might have been able to get a mortgage loan with credit that would make you ineligible for other types of loans, the collapse of the housing bubble and the declining economy in general made mortgage lenders reluctant to give loans unless they are reasonably sure you will be able to pay it. Now more than ever, the better your credit is, the more likely you are to get a loan that has good terms and fits all of your needs.

Understanding Your Credit History

Your credit history is a record of your ability to pay your debt obligations on time. Credit score is the numerical value of your credit history. It ranges between 200 and 850. The higher the credit score, the better your credit history is. The credit scores are compiled by credit reporting agencies. Once the credit scores are compiled, these agencies will sell them to the lenders. Since the scores vary slightly between agencies, lenders will often try to get all three. Your credit score is compiled using several different factors. They include:

  • Payment history – this is based on the number of times you missed your monthly payments on your credit cards and other loans, as well as how often you failed to pay your loan altogether and how long it took you to repay your existing debt.
  • Credit utilization – this is the ratio of the amount of credit you use over your current credit limit. In order to maintain good credit score, you must spend no less than 10 percent and no more than 30 percent of your credit card limit. It is worth noting that closing your credit card accounts will make the score worse, since your spending from those accounts drops down to zero.
  • Length of credit history – the longer you use credit while paying your bills on time, the better credit score you will be.
  • Types of Credit Used  – the more types of credit you use, the bigger your credit score will be. In other words, you should have several different types of loans and several different credit cards.
  • Number of credit inquiries – this is based on the number of times you try to get new credit. Generally speaking, the more often you try to get credit within a short period of time, the lower the credit score will be. This does not apply to mortgage and auto loans – you can apply for them as often as you want.