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Why Your Credit Report Matters to Mortgage Lenders
by Cyndy Hardy
Every time mortgage lenders make a loan they run the risk that the borrower can’t or won’t pay it back. Lenders use many tools to analyse and reduce that risk, including your consumer credit report.
Think of it like a resume.
Your resume tells an employer if you are a good match for his company. He can see what kind of job experience you have, whether you jump from job-to-job and what education or special skills you offer.
Your credit report tells a lender what kind of risk you are.
Do you pay your bills on time? Are you over-extended?
Mortgage lenders will “pull” your credit report from one to two credit reporting agencies at least twice during the loan process: once when you make the application; and again just before the deal closes in case new information becomes available.
The two major reporting agencies are Equifax and Experian.
Credit bureaus are required to report fair and accurate information in compliance with the law.
Credit reports contain four types of information:
• Personal information such as your name, current and previous addresses.
• Your credit history including the names and addresses of your creditors; account limits and balances payment history; and whether you have a co-borrower. It also states how long you’ve had the accounts.
• Public records such as bankruptcies, tax debts and outstanding judgments.
• A record of inquiries for your credit history, whether initiated by you or by a third party.
Personal Information
Personal information on your credit report, along with other documentation, simply tells lenders that you are the person who is applying for the loan and that the accounts in the credit file are yours.
Lenders may check your residency histories against the information in your application.
Credit History
Lenders generally look at the past five years and want to see that you have at least four major lines of credit.
They will compare information about your credit accounts to those you disclosed on the loan application.
Mortgage and rent accounts are most important to lenders because they reflect your ability and inclination to pay for your home compared to other debts.
If your payment is 30 days late on these accounts – even once –you might not qualify for the best mortgage loan terms.
Lenders also consider your monthly payment amount. If your current rent is £800, a lender might determine that a £1,500 mortgage payment is too much of a shock for your financial experience.
Next, lenders will look at your other credit accounts such as student loans, installment debts and revolving credit accounts like credit cards.
Obvious red flags include late payments, collections, bankruptcies and repossessions. Lenders also look for whether you have too much debt compared to your income and whether you have available credit limits that could affect your ability to pay if they are suddenly maxed out.
You might still get a loan, but you’ll probably pay a higher interest rate and/or have to put more money down upfront.
Public Records
Lenders are concerned about these records because unpaid judgments and liens can have priority over their loan in a bankruptcy proceeding. Also, if you pay alimony, child support or fines to a court, a lender will calculate those payments into your ability to repay a mortgage loan.
When collection efforts fail, creditors can write off a bad debt for their tax purposes. These accounts show on your credit report as charge-offs.
In many cases, you’ll be required to pay off these records before you’ll qualify for a mortgage loan.
Satisfying a public record does not mean it automatically drops off of your credit report.
Most derogatory public records can remain on your credit report for up to seven years. Bankruptcies and unpaid tax liens can remain for years.
Inquiries
When you or, a third party, request a copy of your credit report an inquiry is recorded in your file.
Since credit accounts can take several weeks to appear in your credit file, multiple inquiries tell a lender that you might be taking on debt that will affect your ability to repay their loan.
Your Credit Score
Each credit reporting agency uses a credit risk-scoring mechanism to help lenders streamline the application process.
The first credit-scoring model was developed in the 1960s by the Fair Isaac Corporation, a business consulting firm that specialises in enterprise decision management. It’s trademark FICO scoring system is used worldwide by consumer lenders.
FICO scores range from about 300 points to 850 points. The higher you score the less risk you pose to a lender.
Five areas of your credit report are calculated into your total risk score.
Here’s how the data stacks up:
• Payment history – 35 percent.
• Amounts owed – 30 percent.
• Length of credit history – 15 percent.
• New credit – 10 percent.
• Types of credit in use – 10 percent.
Your credit score can vary from one bureau to another depending on which bureau your creditors report to. Mortgage lenders generally use the middle score in determining your credit worthiness.
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