Why Is Your Credit Rating So Important

Throughout your adult life, you’ve likely been bombarded with informational posts proclaiming the importance of your credit rating. Unfortunately, many of these suggestions don’t delve into the real importance of retaining a high credit rating. Do you know what is a good credit score number? Or the difference between secured and unsecured debt? What about the advantages of a fixed vs adjustable rate mortgage loan? Throughout the past several decades, millions of Americans have become dependent on their lines of credit for their financial security. Because of this, it’s even more important that you fully understand how your credit rating and credit reports impact your financial and personal life.

Credit Rating – A Basic Definition

Credit-ScoreIn order to understand the true importance of a credit rating, you need to understand what it is. In the most basic definition, your credit rating is a three digit score delivered by the top three credit bureaus. This score is determined by your financial spending and history. This statistical method of determining your likelihood of paying back money you’ve borrowed is used by credit card companies, mortgage lenders, personal loan lenders and even your cell phone company to determine whether or not you’ll actually repay the money you’ve borrowed.

The determination of your overall credit rating is based upon a variety of evaluation system. In fact, each of the three top credit bureaus calculate this rating according to their own algorithms. Regardless of their specific determining factors, your credit rating is likely created by evaluating your credit payment history, length of credit history, types of credit, frequency of credit inquiries as well as the level of your current debts. The weight of each of these factors can vary; however, all three bureaus call upon this information when determining your overall credit rating.

The Importance of Your Credit Rating

Whenever you apply for a new line of credit, whether this be a mortgage or credit card, your overall credit rating is checked by sending an inquiry to each of the three credit bureaus. Based upon this rating, the financial institution is able to determine your credit risk. The level of this risk determines your interest rates and whether or not you’ll actually repay your debts.

The largest purchase most people will make is the purchase of a home. Therefore it is important to know what credit score is needed to buy a house, and where you fall into that range. The credit score needed to purchase other large ticket items, such as a vehicle, are also stringent, but far less than that of a home mortgage loan.

In the most fundamental sense, if you have a low credit score, credit lenders will want to safeguard their investments by lending you money at a significantly higher rate than someone who has a good credit rating. Therefore, when you have a poor credit rating you’ll actually end up spending more money on a loan when compared to someone with a good credit rating.

Because of this, sustaining a good credit rating will actually save you money in the long-run. In the most serious of cases, if your credit rating is terrible, you’ll actually be turned down by the lender. This can mean you won’t be approved for a mortgage, rental agreement or even a standard cell phone.

The Best Alternatives to a Reverse Mortgage Loan

If you’re over the age of 62, then you’ve probably been contacted about obtaining a reverse mortgage loan. In the most general of definitions, this is when you convert the equity within your home to cash. By borrowing against your developed equity, you’re able to obtain a fixed monthly payment or a large line of credit. Repayment of such loans is typically deferred until you sell your home, move out or you pass away. Upon this, the house is sold and after repayment of the loan the rest of the value is transferred either to you or your designated heirs.

While this may seem like an excellent option for many elderly homeowners, if the process isn’t handled correctly there can be a host of problems. Even though this may seem like the best option for many homeowners, there are several alternatives to the traditional reverse mortgage loan. Of course, the final decision is based upon your unique situation. You should always discuss this option with a financial planner to determine which option is safest for you and your family.

Alternative #1 – Existing Mortgage Refinancing

RefinanceIf you already have an active mortgage, you may free up some cash by refinancing your mortgage for a lower interest rate. The most common reason for doing this is to save you money over the life of your loan by decreasing your monthly payments and reducing the amount of money you spend on interest rates. Perhaps the greatest benefit of refinancing your existing mortgage loan is your home remains as a serious asset to your family.

Alternative #2 – Home Equity Loans

home-equity-loanEssentially, a home equity loan is a referred to as a second mortgage. This type of financial lending allows you to borrow money by leveraging the amount of equity you’ve built into your home. The process is the same as a traditional mortgage. Upon acceptance, you receive a lump sum of cash, which can be used as you see fit. Another benefit is the interest you pay in an home equity loan is typically tax deductible up to $100,000.

Alternative #3 – Home Equity Line of Credit

home-equity-line-of-creditBy taking out a home equity line of credit, also referred to as HELOC, you’re actually able to borrow up to your approved credit limit whenever you need it. This differs from home equity loan, as you’re only paying interest on the amount of money you withdraw. These adjustable loans mean your monthly payments will fluctuate with the market, which can be an issue for those who are living on a strict monthly budget. The biggest downside of this type of loan is the risk you run if you fail to make payments. If you default on your loan, your home can be foreclosed upon.

Most Common Alternatives to a Traditional Mortgage Loan

Whether you’re buying a home for the first time or you’re about to purchase a home for the fifth time, there are many reasons why a traditional mortgage loan may not be your ideal choice – or even an option. Perhaps traditional mortgage loan lenders aren’t inclined to approve your loan request because of a sordid financial past or perhaps you have a decent amount of assets, but the lender isn’t convinced you have ample cash flow to make regular monthly payments.

Whatever the reason may be, a traditional mortgage loan isn’t your only option when you’re looking to buy a home. While certain options may not be applicable for all situations, the following are the most common alternatives to a traditional mortgage loan.

Alternative #1 – Whole Life Policy

If you have a whole life insurance policy, which is a policy that accumulates cash value over time whenever you make a premium payment, then you may actually borrow against the cash value you’ve accumulated. When you borrow against your whole life policy, there are no qualification factors. Although this strategy can enhance your overall borrowing potential, it can significantly reduce the face value of your policy should it not be paid back.

If you’re considering this alternative option, there are several questions you should ask your insurance company:

  • What is the applied interest rate on the loan?
  • Will borrowing against the policy significantly reduce your annual dividend?
  • Is my withdrawn amount taxable?
  • How will the loan influence the policy death benefit?

 

CONVENTIONAL-HOME-LOANAlternative #2 – Seller-Based Financing

When you choose seller financing, you actually bypass the traditional financial industry and make a mortgage payment directly to the seller of the property. This unique form of financing involves an official agreement, which should clearly outline the principle loan amount, interest rate and overall repayment schedule. While this can be viable option for many borrowers, it’s only applicable should the current homeowner completely own the property.

There are several benefits to this type of financing option. When available, the closing process can be much faster and since you’re not dealing with a traditional financial institution, it’s generally a less-expensive option.

Alternative #3 – Rent to Own Properties

Also referred to as a lease option, a rent-to-own arrangement is just as it sounds. You’ll officially be a renter withint he property; however, at the end of the specified initial term you have the option to actually buy the property. While monthly rent payments are typically higher than average, the surplus from each payment is deposited into a specialized account. This money is then used as a down payment in the future. Should you decide not to purchase the house, the extra money is forfeited.

How to Get Approved for a Mortgage

When you desire to actually own a home, the first step you must take is to become approved by a mortgage lender. While advertisements are designed to make you believe that this is an easy and relatively straightforward process, the truth is far from this. In fact, becoming approved for a mortgage is one of the most difficult financial situations millions of Americans will face within their lifetime. Because of this, it’s essential that you spend a decent amount of time researching the various qualifications and scenarios you’ll likely be faced with.

The first step in the process of becoming approved for a mortgage is hold the proper credit score to buy a house. The minimum FICO score to qualify for a mortgage is currently 580, however obtaining a mortgage at this level can be difficult. It is recommended to have a credit score of at least 650 before buying your first home. Although obtaining a mortgage is unique and can vary from person-to-person, there are several tips that are considered universal throughout the Untied States. Whether you’re looking to purchase your first home or are looking to refinance your current mortgage, the following information can help demystify this complex and confusing process.

Tip #1 – Have a Cosigner

Mortgage-loan-approvedIf you don’t have a lot of income or your credit score is less-than-perfect, then you should seriously consider having a cosigner. In the most fundamental of senses, a cosigner is a third party who agrees to the terms of the loan alongside with you. If you decide to go this route, make sure you and your cosigner are fully aware of the legal and financial obligations this agreement requires. For example, if you aren’t able to pay your monthly mortgage payment, then not only is your credit score damaged, but also that of your cosigner. Because of this, it’s important to only go this route if you are confident you’ll never have an issue making your monthly mortgage payments.

Tip #2 – Wait It Out

While you may have a strong desire to own your home now, if your credit score or income isn’t where it should be, perhaps the most effective tip is to simply wait it out. While waiting, actively work on not only increasing your credit score, but also saving as much money as you can for your down payment and other expenses associated with being a homeowner. This is perhaps the most effective tip when it comes to securing a mortgage.

Tip #3 – Spend Less

If you just aren’t able to be approved for a large home loan, then you should consider spending less money by going with a cheaper property. While you may desire a large home in the best part of town, this just may not be feasible for you and your current financial situation. Instead of waiting it out, why not consider purchasing a less-expensive piece of property? This can allow you to obtain a mortgage at a better rate and have an affordable monthly payment.