Your
ability to manage credit is an important factor in determining if you will
repay your mortgage loan. How does the lender decide if you are a
good credit risk? During the loan application process, the lender will
obtain a credit report on you and any co-borrowers. Credit reports are
provided by credit reporting companies/credit bureaus. They provide
information about how you have managed debt, including:
· How much and what types of
credit you use, such as credit cards, auto loans, or other consumer loans;
· How long you have had and used credit;and
· How promptly you pay your bills.
The three major sources of credit information about consumers are Equifax, Trans
Union, and Experian. Lenders will obtain your credit record
from all three of these credit bureaus. The lender will evaluate this
information to determine whether or not you are likely to repay the mortgage
loan in a timely fashion.
How does the mortgage lender evaluate the information in the
credit report? One way is through credit scoring.
What is a credit score? A
credit bureau score, is one of many pieces of information that the lender will use when
evaluating a mortgage loan application. A credit score is a summary of a
borrower's credit report and a numerical measurement that reflects a borrower's
management of credit. Your credit score is based on the records compiled
by credit bureaus and includes the information reported each month by your
creditors, such as the amount of existing credit you have and your payment
history. A credit score considers all of the information in the credit
report and converts this information into a number that helps the lender
determine the likelihood that you will repay your loan on time. 00 is the
lowest possible score, 900 is the highest.
680 to 700 is considered excellent, and
less than 620 is typically considered sub-rime, though if there are errors
on the report, this would be considered.
Credit scoring is an objective process, based only on the information in
your credit report. Factors such as age, race, religion, gender, national
origin, marital status, your income, employment, and where you live are not
considered in determining your credit score.
Is credit scoring new? Banks and other lenders have used credit scoring
for over 30 years for credit cards and other types of consumer loans, such
as automobile and home equity loans. Now, credit scoring is being used
in mortgage lending.
Why are
credit scores used? Lenders want to extend credit to people who
will pay them back, and pay them back on time. They also want to be objective
in making lending decisions. In order to approve your application for a mortgage loan,
your lender must evaluate and understand many different risk
factors, including your ability to repay the debt as well as how you have
managed credit in the past. Because borrowers' credit histories can range
from being very simple to being very complex, it is sometimes difficult to
determine whether a given credit history is acceptable or unacceptable, or
whether certain information represents a strength or a weakness.
By using credit scoring, a lender can quickly and objectively evaluate your
credit history in a consistent manner, and determine the likelihood that you
will repay the loan as agreed. The use of credit scores not only improves
the accuracy of the analysis of your credit history, but does so in a way
that enhances the efficiency and consistency of the underwriting process.
How does a lender get my credit score?
How is my credit score determined?
information in your credit report, including information about how you
have handled debt and credit accounts in the past. The calculations that make
up a credit score are developed by looking at the way millions
of consumers manage their credit. Credit scores have proven over time to
be a reliable indicator of whether or not a consumer would repay a loan. A
score is determined by summarizing a number of factors in your credit
report. These include:
PAYMENT HISTORY. How
have you paid your debts? How often have you paid your bills after they
were due? How you paid your bills in the past gives the lender some
indication of how you can be expected to pay them in the future. If you
have a record of paying your bills after the due date, this can lower
your score. How often you have been late paying your bills, how recently
your payments have been late as well as how long you remained delinquent
on any bill at one time are important factors.
OUTSTANDING DEBT.
How many consumer loans and open charge accounts do you have? What
are the current balances on these accounts? The lender wants to know how
much credit you have and how much you have used. Research has shown that
the number of credit accounts you have as well as how much of your
available credit is used is important.
CREDIT HISTORY. How
long have you had credit? Generally, the longer you have had and have
successfully managed credit, the higher your credit score. However, people
with relatively new credit histories or those with only one or two
accounts can obtain high scores as well.
If you have recently established credit or have only a few credit references, that does not mean that you cannot get a
mortgage. Working with your mortgage lender, you may be able to establish
a “nontraditional" credit report that is based on how well you have
paid other types of debts, such as rent and utility payments.
CREDIT INQUIRIES. How
many times have you authorized a lender to check your credit record? How
many new accounts have been opened recently? Every time you apply for credit
for an automobile or consumer loan, to open a new charge account,
etc. the lender checks your credit history with one of the credit bureaus.
This is called an "inquiry" and is recorded in your credit
report. Sometimes, having many inquiries within a recent period on your
file indicates that your credit usage may be increasing and creates an
additional level of risk for the lender. However, don't worry that
checking with several lenders about a mortgage loan will have a negative
effect on your credit score. The credit report data used to calculate
credit scores does not include auto or mortgage loan inquiries that occur
in the 30-day period prior to the score being calculated, and auto and
mortgage inquiries that occur in any 14-day period are always considered
one inquiry.
TYPES OF CREDIT. What
types of credit do you have in use? Do you have a mixture of types of
credit, such as credit cards, personal loans, etc.?
Your credit score is calculated based on your history in these and other
areas. Having established credit, paying your bills on time, and keeping the
balances on open accounts to moderate levels will help ensure that you
have a strong credit history and a good score.
Are credit scores
discriminatory?
What's my score? Is that
good or bad? Credit scores typically used in mortgage lending
range from approximately 300 to 900. Generally, the higher your credit score,
the less risk of future default you represent to the lender. This is a
strong indication that you have successfully managed credit in the past
and are likely to repay a mortgage loan.
Keep in mind that your credit score is only one factor that the lender uses
to evaluate your mortgage loan application and that the final decision whether
or not to approve your mortgage loan is made by the lender after careful
analysis of all of the information the lender has collected.
Can my score be improved? The answer is, over time, certainly. But it may be
difficult to immediately "fix" your credit score. The most
effective way to make sure that you have the best possible credit score is
to manage the credit you already have in a responsible manner. You can do
this by following two simple rules.
1. Avoid becoming
delinquent on any of your credit obligations (credit cards, automobile
loans, or other installment loans).
Consumers occasionally miss a payment on one of their bills.
A
mortgage foreclosure on your credit report will have a major effect on your
credit score and your ability to get new credit in the future.
2. Avoid overuse of your
credit cards and other credit accounts.
Just as it is important for you to pay your bills on time, it is also
important that you control how much money you owe, especially on your
credit cards. Lenders are increasingly concerned about the credit risk of
consumers who seem to overextend themselves by using most or all of their
available credit even if these consumers are still making payments on time.
Why would the lender need to be concerned if you still are making your payments
on time? In recent years, there have been many news accounts of people in
financial difficulty because they have used their credit cards up to their
maximum limits and then struggled to make their monthly payments. For some
consumers in this situation, the burden of these monthly payments becomes
so great that they stop making payments altogether. Some file bankruptcy.
This can happen to people who have never before missed a payment.
So, while you may think everything is fine no matter how much you
charge, as long as you can pay your monthly bills on time, the fact is
that you are actually a higher credit risk than those that manage their
credit accounts more conservatively.
Credit scores are developed by looking at the way millions of consumers manage
their credit and are able to identify consumers who are becoming overextended,
before they become delinquent. This risk is reflected in the credit scores
of those consumers.
What if I don't have any credit references on my credit
report or just a few accounts? Will I have a credit score? Will I be able to get a mortgage
loan?
You
can obtain a mortgage loan even if you have limited credit references or no
credit at all on your credit report. It is also not a requirement for you
to have a credit score in order to obtain a mortgage.
Even if you have limited credit as little as one credit reference a
lender can still obtain a credit score for you. If you have little or no
credit references on your credit report, the lender will work with you to
develop what is called a "nontraditional" credit report that will
contain information on how you manage financial obligations like rental
payments, utility payments, and other items that do not normally appear on
a credit report.
Will my lender tell me my
score? The decision is up to
the lender and they are not required to share credit scores with
borrowers. The lender can tell you if a credit score was used as part of the
decision to approve or deny your loan. If your loan is denied, the lender can
help you understand what reasons caused the denial and what you can do to
get on the path to homeownership.
How do I know if the information used to calculate my credit score
is correct? How do I get a copy of my credit report?
Your credit report reflects the
information reported to the credit bureaus by each of your creditors. This
information changes every time something is added or deleted from your
credit file. For instance, paying off an existing account,
opening several new accounts, or exceeding the credit limit on one of your
accounts will be reflected in your credit record.
Sometimes credit reports are inaccurate. There are also situations
in which the time between when you open or close an account or make a payment
and when this information is updated in your credit report makes it appear your
credit report is inaccurate. The best way to ensure that the information
contained in your credit files is correct is to periodically request copies
of your credit report. Each credit bureau keeps its own records, so you
may want to request copies from all three: Trans Union, Equifax, and Experian.
Credit bureaus generally charge a small fee for a credit report; however,
some states now require that they give free or discounted reports. In
addition, if you have been turned down for credit because of information contained
in your credit report, you are entitled to receive a free copy of your
report within 60 days of the denial. If you think your report contains mistakes,
notify the appropriate credit bureau listed in this brochure directly to
ensure that the errors are corrected in your file. They will investigate
the item and remove any incorrect information. If information in your
credit file changes, your lender may want to request another
copy of the report and a new credit score. Keep in mind, however, that making
changes to your credit report may not change your credit score.
It is recommended that you obtain and review a copy of your credit report
before you begin the mortgage
loan process. To obtain a copy of your credit report, contact the
following credit bureaus:
Equifax: (800) 685-1111, TransUnion: (800)
916-8800, Experian: (800) 682-7654.
For
additional information, you may want to visit the Equifax, Trans Union, or Experian world wide web
sites:
Equifax: equifax.com,
Trans
Experian:
experian.com.
If there are errors in my credit report do I have to wait for
them to be corrected before applying for a mortgage?
No. If you have reviewed your credit report and found errors, you
should contact the credit bureau immediately and get it to correct the
information. You still can apply for a mortgage while this information is being
corrected. Just explain the circumstances to the loan officer and explain that
the credit bureau is correcting the information.
If you already have applied for a mortgage loan, your loan officer still can evaluate
your credit report and your loan application without a credit score by
reviewing the information that is correct in your credit report. However,
lenders do consider consumers who establish a pattern of frequently paying
their bills late to be greater credit risks than those who pay on time. As a
result, lenders often are reluctant or unwilling to extend new or
additional credit to these consumers. Credit scoring reflects not only this
concern, but the actual experience of lenders.