Missed Mortgage Payments' Affect on Credit Score

BILL'S ANSWER

Typically there are several considerations when getting a mortgage loan -- three of the most important are: i) your loan-to-value; ii) your debt-to-income ratio; and iii) your credit rating.

1. Loan to value: This is calculation looking at how much you want to borrow, relative to the value of the home. It is directly impacted by the amount of money that you can put down on your new home. The larger the down payment, relative to the value of the home, the less risk the lender has to take in extending to you a loan.

2. Debt to Income: This ratio looks at your monthly debt obligations (payments of interest and principal) as a percentage of your monthly income. If you have a significant amount of debt, your debt service burden may be too high for a lender to comfortably give you a loan. You need to either increase your income, or cut your debts.

3. Credit Rating: Your loan, including terms like interest rate and points, will depend on your credit worthiness. One measure of credit quality is a credit score (sometimes a specific 'FICO' score). Your credit rating is calculated based on several variables, including: your payment history (do you have any late payments, charge-offs, etc.), the amount and type of debt that you owe, if you have maxed out any of your trade lines, and then several other secondary factors like the length of your credit history and how many recent inquiries have been made to look at your credit history. If you have a good credit score, you will get a better loan.

A person's credit score usually takes a big hit when mortgage payments are missed, but continuing to pay your accounts on time should slowly improve your credit profile. How long it will take for your score to improve really depends on how much damage your credit score suffered during the past seven years, and how many positive credit listings are now appearing on your credit report.

While I cannot tell you when your credit score will improve, I encourage you to continue making your monthly payments in a timely manner, as the longer you make payments, the more positive influence the accounts will have on your credit history. I encourage you to regularly obtain copies of your credit reports from the three major credit bureaus (Equifax, TransUnion, and Experian) to verify that all listings appearing on your report are accurate. If you find any inaccurate credit listings, you should dispute the item with the credit bureau reporting the information. You can receive a free copy at AnnualCreditReport.com. See the Federal Trade Commission document FTC Facts for Consumers: How to Dispute Credit Report Errors for more information.

I also encourage you to visit the Bills.com Mortgage Resources page, where you can read about the various types of mortgages available on the market and determine what type of loan you are interested in borrowing. If you enter your contact information in the Bills.com Savings Center at the top of the page, we can have several pre-screened mortgage brokers contact you to discuss the options available to you. Bills.com also has useful tips on tracking and improving your credit.

Keep up the good work of paying those bills, reducing your debt, and increasing your savings, and eventually you see your credit score rise.

Best,

Bill

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