Let’s say you’ve decided to downsize. Maybe it’s for budgetary reasons or maybe it’s because your children are grown and gone and you don’t need as much house. But what if you were late on a couple of payments on your current mortgage? If you will need a new mortgage for that smaller house, would you be able to get one?
The bad news
Unfortunately, if you have bad credit because you have late payments on your current mortgage, this will be a red flag to any lender where you apply for that new mortgage. It’s even worse if those late payments occurred recently. What also matters is timeliness. If you miss the grace period, this isn’t nearly as awful as if you were 30 or more days late. If you were 60 or more days late, this is even worse.
Learning where you stand
If you are late in your mortgage payments or any other payment this will already be reflected in your credit report. So if you want to know where you stand, you need to get your credit report from one of the three credit-reporting bureaus – Experian, Equifax and TransUnion. They are required to give you your credit report free once a year. You could contact one of the bureaus directly or go to the site www.annualcreditreport.com and get one or all three of your reports. Go over the report carefully to make sure that none of the information is erroneous. If so, you can dispute it with the credit bureau by writing a letter and attaching whatever supporting documentation you have. However, as the following video points out, there is also a reason why you might not want to dispute an error.
Your credit score
Next, you will need to get your credit score from one of the three credit reporting agencies or on the site. www.myfico.com. If you get your score from one of the three bureaus or from an independent source such as CreditSesame.com, it won’t be your true FICO score. But it should be close enough for you to know where you stand in terms of how credit worthy you are. This is fairly easy because credit scores are classified in ranges as follows:
- Between 700 and 850 – Very good or excellent credit score
- Between 680 and 699 – Good credit score
- Between 620 and 679 – Average or OK score
- Between 580 and 619 – Low credit score
- Between 500 and 579 – Poor credit score
- Between 300 and 499 – Bad credit score.
If you were to find that you had a credit score of 520 or less, you would probably have a very hard time getting that new mortgage and if you did, you’d be hit with a much higher interest rate. As an example of this, if you had a credit score of 760 or above, you could probably qualify for an interest rate of 3.887% on a 30-year fixed-rate mortgage. In comparison, if your credit score was below 640, the best interest rate you could expect to get would probably be 5.476%. That 1.58% difference may not seem like much but would literally cost you thousands of dollars extra over the course of a 30-year mortgage.
As time passes
The only good news is that as time goes by, those late payments should have less of an impact on your credit score. If your late payments were recent, you’re kind of out of luck. When potential lenders calculate the interest rate on your mortgage they use what’s called “risk-based pricing.” This means a bad credit score will mean a higher mortgage interest rate because you’ll be perceived as more of a risk. Even with this, you should be able to find a lender who will provide you with a mortgage to finance that new house. If you apply to multiple lenders, make sure you concentrate those applications within two to three weeks. This will make it clear that you are shopping for a loan and won’t damage your credit score as it would if you strung out those applications over a long period of time.
One quick fix
While there’s not much you can do about those late payments, there is one quick fix you could do to improve your credit score and that’s to pay down your debt. One of the major components of your credit score is your debt-to-credit ratio. In fact it makes up 30% of your score. This ratio is easy to calculate. Just add up all of the credit you have available (your total credit limits) and the total amount of credit you’ve used. Then divide this by your total credit limits. Supposing you had total credit available of $10,000 but had used up $4000 of it, you would have a debt-to-credit ratio of 40%, which most experts say is too high. If you could pay down that debt to, say, $2000, this would yield a debt-to-credit ratio of 20%, which could give your credit score a nice boost. Alternately, if you couldn’t pay down your debt, you might be able to get one of your creditors to increase your credit limit, which would have the same affect on your debt-to-credit ratio.
One mistake you shouldn’t make is to close a credit card after you’ve paid it off. Another factor in your credit score is called your credit history or the amount of time you’ve had credit. When you close a credit card, this reduces your credit history and will reduce your credit score.