The Role of Credit
Your credit report, score, and history are all major factors when it comes to applying for a loan, so it’s important that you understand how credit works, and how will be analyzed. Your mortgage broker will analyze your credit report as soon as it is obtained, and will ensure that the credit report they have is in fact yours.
A broker will first look for any judgments against you and collection accounts. These will require full explanations, or may have to be paid down before you are eligible for a loan.
Your lender will also look at the number of recent inquiries and why, as this may suggest to them that you have recently applied for credit elsewhere and were denied. They will be comparing your debts and the ages of your accounts. If you incurred debt very recently, they may want to know what the money was used for. They will check to see if you have made many late payments, and when this happened. Every lender has their own acceptable limits for these factors so your broker will check to see that your accounts fall within these limits. Your broker will also ensure that they have a completely up-to-date credit report. This is because a borrower may open a new account or incur new debt, and thus change their financial status, if too much time elapsed between when a report is produced and when it is analyzed.
Finally, your credit information is your personal, private financial data. Your loan officer or mortgage broker should never share your information with any outside party, including a real estate agent or firm, without your express permission.
Bad credit is a big issue for many borrowers, and how it is handled will depend primarily on the lending institution. People are capable of change and your lender will consider this as a possibility. Basically, this means they will look at how long ago your credit was negatively affected and compare that to your recent financial activity. If you have shown reasonable improvements, and have an acceptable explanation as to why your credit was negatively affected, it may have less of a bearing on your application. For instance, an old debt that shows you have more been making timely appropriate payments will be less likely to have a large impact on your overall credit worthiness.
Your lender will also look at what caused the bad credit. How did you get yourself into that situation and what have you done to change that? If the credit trouble is very recent and there is not enough information (or time passed) to show you have made appreciable differences in your borrowing behavior, you will likely not be approved for anything but a debt re-structuring loan.
Some lenders will accept a borrower with bad credit, but will add particular borrowing stipulations. Common credit stipulations include requiring a larger down payment, a tighter limit on debt to income or loan to value ratios, and requiring additional forms of collateral.
A professional mortgage broker will usually not provide you with a copy of your credit report. If you have past judgments, poor credit, or are worried about other potential aspects on your credit report, you are encouraged to contact the credit bureaus yourself to obtain your own copy.
Your credit report will take precedence over your word, so if there are discrepancies between the debt you should have and what is shown on your report, you must contact the credit bureau to have these issues addressed. If you are unable to change the information on your credit report, be aware that the information will be trusted over anything you might tell your broker.
No Credit History
It may be that you have not yet built up a large amount of credit information. This can happen in a number of ways, including when a person is only just starting out and has made no large financial or credit decisions. Fortunately, if this is the case for you, there are other ways for your lender to estimate your credit worthiness.
Indications of Credit Worthiness:
• Timely rent payments
• Timely utility payments
• You self-paid for some or a portion of your education
• Reasonable savings amassed (given the amount of time you’ve been in the workforce)
• Your down payment plan (how are you going to pay it)
• Personal assets (do you own your own vehicle, for instance)
If you lack sufficient credit history you may need to comply with certain borrower criteria. This may include showing proof of large cash transactions in the past, needing a co-signer with established credit, or a gift letter requirement.
The Three ‘C’s
Lenders prefer that 3 key elements be reasonable and balanced before approving a loan. These elements are called the “3 C’s”; credit capacity, credit character, and collateral. Although a weakness in one or more of these areas will not necessarily result in your application being rejected, the loan process is much easier and has a much higher chance of success when these elements are inline with each other.
Credit capacity is an official evaluation of your ability to repay a loan. It will be determined by looking at your employment information and past, income, and other financial obligations you have (such a child support payments).
This is a reasonable estimate of your willingness to repay the loan. This requires an evaluation of your credit history. Have you repaid loans in the past? How much debt have you incurred and why? Do you pay your bills on time? Do you know how to live within your means? They will also look at how stable you have been in the past. Have you been fired or quit jobs frequently? How often have you moved? Much of this information will be gleaned from your credit score and report.
Your lender will always want to consider their options for recourse should you default on a loan. Collateral first includes the market value of the property you wish to buy, and then includes your additional assets. Collateral and assets are a measure by which lenders evaluate your credit capacity. If you have other resources for income, property, or savings, this could impact their decision to lend to you, despite a weak credit history.
Lenders use different combinations and aspects of these elements to make their decisions. This may mean that a particular lender has higher standards than another, or that they refuse to give out specific loan types all together. Not every lender has a quantified, formulaic approach to how these elements are weighed against each other. Some lenders may go entirely off of industry experience. Many will evaluate you according to a point system, assigning or subtracting points from an overall figure depending on the 3 ‘C’s and then comparing the final total to a set point standard.
Different lenders may reach different conclusions regarding your credit worthiness.