Future favorable financing deals, low rates and preferred credit offerings all will be available depending on how well you manage the grandaddy credit type: a mortgage loan.
Generally, when you take out a mortgage on home, you can expect a sharp and noticeable increase in all three credit scores, just by virtue of making a timely mortgage payment ‘paid as agreed’ without a late. Even as much as a twenty to forty point increase over a few of months of payments is quite. By the same token, a a 30 day mortgage late, can easily drop your credit scores 60 points or more depending on the history with the rest of available and closed credit accounts you have. Put simply, if you have other negative credit history including such items previous lates, collections, max out credit credits, a mortgage late coupled with any of those things may result in a more severe credit drop, hence making a mortgage payment on time is key.
The mortgage loan itself whether that is an amortizing loan paying down the principle of interest over time or even an interest only loan, does not have one bearing against credit score. No, your mortgage type does not hurt your credit score, unless you get behind 30 days past due. Your lender (servicier collecting your payment) is obligated to report to the credit bureaus. This negative credit reporting will play an adverse rolling your ability to procure credit. A few days late on a mortgage payment, while it will not be reported, expect your lender to charge you a late fee.
One loan type to be cautious of is a home equity line of credit, not technically a mortgage loan like a typical 30 year fixed rate, this loan type max hurt your scores. Think of a home equity line of credit as an enormous credit card secured your house giving the ability to use i.e. accumulate debt by spending, which reduces the available line of credit, pay down the balance and the available credit opens backup, identical mechanics of a credit card.The credit card is secured by your promise to pay and as such contain a higher rate and apr wherein an equity line is secured by your home, creating less risk for the lender, rewarding you with a lower rate/apr in comparison.
A known credit score rule is to keep your credit card balances to no more than 30% of the total allowable credit limit. Same concept for an home equity line of credit. If you have a home equity line of credit for example with a $100,000 credit limit and you carry a $100,000 balance on that line of credit, like it or not, your credit score is adversely affected to some degree- probably to the tune of about 15 to 20 points respectively.
Mortgage tip: A word to the wise -avoid carry high balances on equity lines if your goal is preserving your score.
Some ways to fix the equity balance on credit score:
- Pay down the balance
- Ask lender to increase the credit line, but do not spend more on the credit limit of the new line size
- Ask lender to convert into an amortizing loan paying down balance over time
- Refinance the loan
*Fixed rate seconds contain higher rates than first mortgages. It may make sense to convert the balance of the equity line into one new first mortgage
Other Loan Types That Do Not Affect Your Credit Score
→FHA Loans– thought of as the new subprime loan, this loan does not adversely affect your credit score. Granted, even though it is designed as “the” low down payment loan program offers much more forgiving allowances on short sales, bankruptcies, and even foreclosures. FHA Loans in recent years have gotten a bad rap due to property characteristics and high mortgage insurance. Generally, a house will pass FHA standards so long as there are no health and safety hazards. HUD also recently announced a considerable reduction of mortgage insurance on these loan types, making these loan more consumer friendly.
→Harp Loans-this program is for anyone whose loan is owned by Fannie Mae or Freddie Mac and was taken out June 1, 2009 or before. The program was designed to help people who otherwise couldn’t refinance due to equity-to allow these people to refinance with today’s low rates without any loan-to-value restrictions.
→Modified loans- as long as there is no payment lates should not adversely affect your credit score. One aspect of modified loan that may make you less creditworthy – there needs to be at least 12 months from the time the loan was modified and payments paid as agreed with no derogatory relates to get a new mortgage post loan modification or if the loan modification was on another property, that is not the property being financed, then you meet most home lending credit thresholds.
→Private Loans-99% of the time these loans will never hurt your credit score because they are never reported to the credit reporting agencies late or not.
*Mortgage Tip: the last thing you think may hurt score is is actually is your rental payment. If you are trying to buy a home this may out brakes on hard. Recently, we’ve seen rental obligation payments report to the credit bureaus similarly the way a mortgage loan does. Meaning that if you are ever late on your rent payment, that will hurt your credit score because it’s being reported to the bureaus. Be smart, thoroughly review your rental agreement to know if your rent payment will be reported to the credit bureaus.
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