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In general, lenders use credit
scores because it gives them a quick, objective measurement
of a borrower’s credit risk. The higher the borrower's
score the lower the risk to lenders when extending new
credit. In most cases, you will never personally meet
the person you are getting your home loan from, so lenders
usually base their decision on who to give a loan to on
three factors: |
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Your Credit Score
The use of credit scores makes credit application reviews
more efficient for lenders and makes instant credit
approval possible. Before credit scores, lenders manually
looked over each applicant's credit report to determine
whether to grant credit. This method was time consuming,
costly and human judgment was prone to mistakes and
bias. The use of credit scores eliminated personal bias
from the approval process since your race, religion,
gender, age, marital status, political affiliation or
any other personal characteristics are not factors in
credit decisions.
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Your Capacity to Pay
Bills On Time
A lender will look at your income and your total debt
to get a picture of what your financial status is like.
They will look to see if you can effectively handle the
additional costs associated with owning a home. If you
end each month without any money left in the bank, or
if you are having trouble making your credit card minimum
payments every month, you will have trouble getting a
loan compared to someone who makes all payments on time
and has money left at the end of each month.
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Your Collateral
Lenders will look to see what sort of assets you currently
have (car, boat, home, etc.). They will then look at what
is paid off and what loans you are still paying off. The
more assets you have that are paid for, the better you
will look to a lender. This shows you are responsible
and have demonstrated the ability to make monthly payments.
It also means that you have things you can sell off for
money in case you run into problems. This is added security
for a lender since they know there are other sources to
collect on in the event of something unforeseen happening
to the borrower.
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