What to Know About Mortgages and Credit

This is how mortgage companies operate and why credit is so important.

Today is part one of my two-part video series detailing the mortgage process. Two-thirds of all homebuyers purchase with a mortgage loan. What do mortgage companies actually do? I think understanding that will help you realize the importance of your mortgage.

What most people don’t realize is that mortgage companies are very sophisticated manufacturing lines. They take all of your info and package it in a way to create a saleable asset (their loan package) into the secondary markets. Most of the lenders making loans today will fund the loan with their own money and then sell those loans in bulk to the secondary market.  

“One of the best practices is to use a little credit and pay it off each month.”

When they do that, it allows them to remain liquid and give out more loans. In the event that a lender doesn’t package that loan file the right way, and they can’t sell it in the secondary market, they either have to work with you to refinance that property or hold on to it in their portfolio. However, they don’t want to do that because they want to turn that money over, give another loan, and make their money on loan fees. 

As a homebuyer looking to get a loan or a homeowner looking to refinance, there are four major things that lenders look at. Today I’m going to focus on credit, and next time I’ll cover the other three.

Your creditworthiness to a lender is not all about your score. Depth of credit is important too. It can impact your ability to qualify for a loan. If you have a bunch of maxed-out credit cards, your score won’t be very good because your utilization rate is very high. If you have a ton of cards and aren’t using them at all, your score won’t be great either. One of the best practices is to use a little bit each month and pay it off on time. 

Other derogatory consumer debt items, like a car, can work against you as well. It’s important to communicate with your lender throughout the process, especially if you need to improve your credit to qualify for a better loan. You may make a mistake, but a loan officer will advise you on the best path forward and help you avoid any deal-killing mistakes.

We’ll examine the roles of income, assets, and collateral in our next post. If you have any real estate-related questions for me in the meantime, don’t hesitate to reach out via phone or email. I look forward to hearing from you soon.