Most people applying for a home mortgage
need not worry about the effects of their
credit history during the mortgage process.
However, you can be better prepared if you
get a copy of your Credit Report before
you apply for your mortgage. That way, you
can take steps to correct any negatives
before making your application.
A Credit Profile refers to a consumer credit
file, which is made up of various consumer
credit reporting agencies. It is a picture
of how you paid back the companies you have
borrowed money from, or how you have met
other financial obligations. There are five
categories of information on a credit profile:
- Identifying Information.
- Employment Information.
- Credit Information.
- Public Record Information.
- Inquiries.
NOT included on your credit profile is
race, religion, health, driving record,
criminal record, political preference, or
income.
If you have had credit problems, be prepared
to discuss them honestly with a mortgage
professional who will assist you in writing
your 'Letter of Explanation.' Knowledgeable
mortgage professionals know there can be
legitimate reasons for credit problems,
such as unemployment, illness, or other
financial difficulties. If you had problems
that have been corrected (reestablishment
of credit), and your payments have been
on time for a year or more, your credit
may be considered satisfactory.
The mortgage industry tends to create its
own language, and credit rating is no different.
BC mortgage lending gets its name from the
grading of one's credit based on such things
as payment history, amount of debt payments,
bankruptcies, equity position, credit scores,
etc. Credit scoring is a statistical method
of assessing the credit risk of a mortgage
application. The score looks at the following
items: past delinquencies, derogatory payment
behavior, current debt levels, length of
credit history, types of credit and number
of inquires.
By now, most people have heard of credit
scoring. The most common score (now the
most common terminology for credit scoring)
is called the FICO score. This score was
developed by Fair, Isaac & Company,
Inc. for the three main credit Bureaus;
Equifax (Beacon), Experian (formerly TRW),
and Empirical (Trans Union).
FICO scores are simply repository scores
meaning they ONLY consider the information
contained in a person's credit file. They
DO NOT consider a person's income, savings
or down payment amount. Credit scores
are based on five factors: 35% of the score
is based on payment history, 30% on the
amount owed, 15% on how long you have had
credit, 10% percent on new credit being
sought, and 10% on the types of credit you
have. The scores are useful in directing
applications to specific loan programs and
to set levels of underwriting such as Streamline,
Traditional or Second Review. However, they
are not the final word regarding the type
of program you will qualify for or your
interest rate.
Many people in the mortgage business are
skeptical about the accuracy of FICO scores.
Scoring has only been an integral part of
the mortgage process for the past few years
(since 1999); however, the FICO scores have
been used since the late 1950's by retail
merchants, credit card companies, insurance
companies and banks for consumer lending.
The data from large scoring projects, such
as large mortgage portfolios, demonstrate
their predictive quality and that the scores
do work.
The following items are some of the ways
that you can improve your credit score:
- Pay your bills on time.
- Keep Balances low on credit cards.
- Limit your credit accounts to what
you really need. Accounts that are no longer
needed should be formally cancelled since
zero balance accounts can still count against
you.
- Check that your credit report information
is accurate.
- Be conservative in applying for
credit and make sure that your credit is
only checked when necessary.
A borrower with a score of 680 and above
is considered an A+ borrower. A loan with
this score will be put through an 'automated
basic computerized underwriting' system
and be completed within minutes. Borrowers
in this category qualify for the lowest
interest rates and their loan can close
in a couple of days.
A score below 680 but above 620 may indicate
underwriters will take a closer look in
determining potential risk. Supplemental
documentation may be required before final
approval. Borrowers with this credit score
may still obtain 'A' pricing, but the loan
may take several days longer to close.
Borrowers with credit scores below 620
are not normally locked into the best rate
and terms offered. This loan type usually
goes to 'sub-prime' lenders. The loan terms
and conditions are less attractive with
these loan types and more time is needed
to find the borrower the best rates.
All things being equal, when you have derogatory
credit, all of the other aspects of the
loan need to be in order. Equity, stability,
income, documentation, assets, etc. play
a larger role in the approval decision.
Various combinations are allowed when determining
your grade, but the worst-case scenario
will push your grade to a lower credit grade.
Late mortgage payments and Bankruptcies/Foreclosures
are the most important. Credit patterns,
such as a high number of recent inquiries
or more than a few outstanding loans, may
signal a problem. Since an indication of
a 'willingness to pay' is important, several
late payments in the same time period is
better than random rates.
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