| Credit
Reports
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 Empirica (TransUnion).
FICO
scores are simply repository scores meaning they ONLY consider
the information contained in a person's credit file. They
DO NOT consider a persons 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've 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, but 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
lates. |
