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 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.
As
of July 1st 2001, California consumers now have
access to their credit scores. Prior to this new law consumers
could only get their credit scores if they were denied a loan.
Want to know your score? Log on to www.myfico.com
and/or www.equifax.com.
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 2002);
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.
A
General Guide to Credit Scoring
| Credit
Score |
Debt
Ratio |
Max
LTV |
Lates
Mortgage
|
Lates
Revolving |
Lates
Install |
|
A+ |
670+ |
36 |
100 |
0 |
0 |
0 |
2 |
0 |
0 |
1 |
0 |
0 |
| A- |
660 |
45 |
100 |
1 |
0 |
0 |
3 |
1 |
0 |
2 |
0 |
0 |
| B |
620 |
50 |
85 |
2 |
1 |
0 |
4 |
2 |
1 |
3 |
1 |
0 |
| C |
580 |
55 |
75 |
4 |
2 |
1 |
6 |
5 |
2 |
5 |
4 |
1 |
| D |
550 |
60 |
70 |
5 |
3 |
2 |
8 |
8 |
4 |
7 |
6 |
2 |
| E |
520 |
65 |
60 |
6 |
4 |
3 |
10 |
10 |
6 |
10 |
8 |
3 |
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.
For
questions about your credit history you can contact the credit
bureaus that maintain this data: But before you do you should
discuss your credit report with your loan officer as he or
she has extensive experience working with borrowers with all
kinds of credit issues.
Equifax,
Inc. 1600 Peachtree St. NW
Atlanta, Georgia 30309
1 800 685-1111
http://www.equifax.com
Experian
34405 W. 12 Mile Rd.
Farmington Hills, MI 48331
1888-EXPERIAN (1 888 397-3742)
http://www.experian.com
Trans
Union Corp. Consumer Disclosure Center
2 Baldwin Place
P.O. Box 1000
Chester, PA 19022
1 800 888-4213
http://www.transunion.com
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