From first grade on, we are all striving to satisfy somebody. The teacher, the pastor, the coach, the bossâ€”they all have expectations. The sooner we learn to see the world their way, the faster we can get ahead.
Mortgage lenders are in the same category. Their opinion of your creditworthiness rests on a few simple things. Some you can't change much in the short term. But all of them, in the course of a lifetime, are well within your control.
This is the number one issue on any creditor's list. A pattern of slow, late, or missed payments will knock down an applicant's credit score faster than bowling pins on Ladies League Night. Your ability to pay is huge, determined in large part by your income and other competing debts. But there is also willingness to pay. And against all odds, even with crushing debt-to-income ratios, there are some people who always manage to make the Mastercard payment. An unblemished payment record can partially offset negatives elsewhere. Your payment history is perhaps 35 percent of your total creditworthiness.
In the underwriter's eyes, pushing your credit limits is a cardinal sin. It's better to have two accounts at half-limit levels than one maxed out. Some say 30 percent is the ideal debt-to-limit ratio on a revolving account, so consider juggling three cards if that's what it takes.
You can't change your age. But you can get started on the path to creditworthiness at a young age by opening a Visa account and faithfully paying off the balance each month. Never borrow money needlessly, but if it makes all-around sense, consider a car loan. A two-year track record of on-time payments will greatly raise your standing among potential mortgage lenders.
It's also preferable to have a variety of credit types such as mortgages, credit cards, car loans, and personal lines of credit. A diversified mix is characteristic of someone with a long credit history.
Note the two key wordsâ€”"proof" and "income." Your hard work as a landscaper may buy you a nice living, but unless you file a 1040 at tax time, you'll be having a lot of short conversations with loan officers. Even in an age when contracting and freelancing is widely accepted, conventional employees with "W-2" pay stubs have a leg up over the self-employed.
Assets go a long way to offset lenders' fear of risk. A property leveraged at 80 percent is less worrisome than one at 95 percent. And a six-figure 401(k) balance is a comfort too, even if they can't come after the money. It gives you options other than defaulting on a loan.
A red flag goes up if your loan request is preceded by a flurry of credit applications elsewhere, especially if they were successful. Can you pay the mortgage if you're also financing a new boat? Rapid expansion of credit can signal desperation and the start of a downward debt spiral if someone's income isn't sufficient to pay the bills.