As part of the mortgage loan application process a lender will look at your credit report. Your credit payment history is recorded in a file known as a credit report. These credit reports are maintained and sold by credit reporting agencies, also known as credit bureaus. The major credit bureaus are Equifax, Trans Union and Experian. The credit report lists your debts (mortgage loans, automobile loans, credit cards, student loans, etc), as well as your payment history. It also may indicate whether judgments have been entered against you, or whether you have filed for bankruptcy.
How your credit is reported is governed by a law known as The Fair Credit Reporting Act (FCRA) which requires credit-reporting agencies to furnish correct and complete information for businesses to use when evaluating your application. You have certain rights under the FCRA which include the following:
You have the right to know all the information in your credit report, including the source of the information in most cases.
You have the right to know the name of anyone who received your credit report in the last 12 months.
You have the right to a free copy of your credit report when your application is denied because of information supplied by the credit-reporting agency. Your request must be made within 30 days of receiving your denial notice.
You have a right to add a 100-word summary explanation to your credit report if the problem is not resolved to your satisfaction.
Credit Reporting Agencies
Lenders look very carefully at your credit as an indicator of your “character” or your willingness to repay your loan. Having poor credit, little or no established credit or unresolved disputes with creditors can affect your purchasing power and your ability to get a loan. To avoid unpleasant surprises down the road, you can request a copy of your credit report for a small fee by contacting any one of the following credit bureaus:
Equifax Credit Information Services, (888) 841-7335 (www.equifax.com)
Experian, (800) 567-5470(www.experian.com)
Trans Union Corporation, (800) 916-8800(www.transunion.com)
As a part of our standard pre-qualifying procedure, we can order a credit report for you. All we need is your full name(s), current address, social security number(s) and age(s) or date(s) of birth. We’ll run the report and review it with you, saving you both time and money.
When you receive your credit report, you should check for the following items:
Incorrect Entries - If there are any mistakes on your credit report (i.e. accounts that aren’t yours or on-time payments that are showing as late), you can have then corrected by writing to each credit bureau and requesting that the information be deleted. They will contact the creditor who must respond in 30 days. If the creditor does not respond, the item will be removed and a new credit report will be issued to you. If there is still a dispute, you can add a 100-word statement to your file explaining your side of the story.
Outdated Negative Credit - If there are unfavorable credit items older than 7 years showing on your report, follow the procedure outlined above. Bankruptcies can be removed after 10 years.
Current Negative Credit - If you have current credit problems, the time to resolve them is before you buy. Re-establishing good credit after a bankruptcy or other credit problems is very important.
Credit Scores - What Do They Mean To Your Loan Approval?
Credit Scores were developed to assist lenders in assessing risk when extending credit to borrowers. Over the past several years the role of credit scores in the mortgage industry has increased dramatically. Lenders making almost any kind of credit decision will look at a variety of types of information, including one or more credit scores. While there are many kinds of credit scores, the most frequently used are credit bureau risk scores developed by Fair, Isaac. These are commonly known as FICO® scores, although they have different names at each of the national credit reporting agencies. A score is a number that tells a lender how likely an individual is to repay a loan, or make credit payments on time. When a lender requests a credit report and score from a credit reporting agency, the score is calculated by a "scorecard" or scoring model — a mathematical equation that evaluates many types of information from your credit report at that agency. By comparing this information to the patterns in thousands of past credit reports, scoring identifies your level of credit risk.
The credit score is determined by a number of factors. The five major categories that help determine your credit score are Payment History, Amounts Owed, Length of Credit History, New Credit and Types of Credit in Use. It’s important to note that a credit score is a “snapshot” taken at a specific time. As items on your credit report change, your credit score will change.
Past Payment History
Approximately 35% of your credit score.
This portion of the credit score looks at how you have made payments on your accounts in the past. Areas that are considered are:
Payment information on your credit accounts. This will include credit cards (such as Visa, MasterCard, American Express and Discover), retail accounts (credit from stores where you do business, such as department store credit cards), installment loans (loans where you make regular payments, such as car loans), finance company accounts and mortgage loans.
Public record and collection items. Reports of events such as bankruptcies, judgments, foreclosures, suits, liens and collection items.
Past Due Accounts.. If your reports show a late payment history, the severity of the late payment will be considered. Payments are recorded as current (I-1, R-1, M-1), 30-days late (I-2, R-2, M-2), 60-days late payment (I-3, R-3, M-3), 90-days late payment (I-4, R-4, M-4), 120-days late payment (I-5, R-5, M-5), and charged off (I-9, R-9, M-9). How recent the late payments and how frequent your were late will effect the credit score. A 30-day late payment made just a month ago will count more than a 90-day late payment from five years ago. Note that closing an account on which you had previously missed a payment does not make the late payment disappear from your credit report.
How many accounts show no late payments. A good track record on most of your credit accounts will increase your credit score.
Credit scores are based on your history over a period of time. To increase your score over time pay your bills on time. If you are behind on payments get the payments current and keep them current. Pay off any collection accounts that appear on your credit report. (Note: Collection accounts will remain on your credit report for seven years).
Amounts Owed
Approximately 30% of your credit score.
Having credit accounts and owing money on them does not mean you are a high-risk borrower with a low score. However, owing a great deal of money on many accounts can indicate that a person is overextended, and is more likely to make some payments late or not at all. Part of the science of scoring is determining how much is too much for a given credit profile. Your score takes into account:
The amount owed on all accounts. Note that even if you pay off your credit cards in full every month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.
The amount owed on all accounts, and on different types of accounts. In addition to the overall amount you owe, the score considers the amount you owe on specific types of accounts, such as credit cards and installment loans.
Whether you are showing a balance on certain types of accounts. In some cases, having a very small balance without missing a payment shows that you have managed credit responsibly, and may be slightly better than no balance at all. On the other hand, closing unused credit accounts that show zero balances and that are in good standing will not generally raise your score.
How many accounts have balances. A large number can indicate higher risk of over-extension.
How much of the total credit line is being used on credit cards and other "revolving credit" accounts. Someone closer to "maxing out" on many credit cards may have trouble making payments in the future.
How much of installment loan accounts is still owed, compared with the original loan amounts. For example, if you borrowed $10,000 to buy a car and you have paid back $2,000, you owe (with interest) more than 80% of the original loan. Paying down installment loans is a good sign that you are able and willing to manage and repay debt.
To increase your credit score keep the balances low on credit cards and other “revolving credit, pay off debt rather than moving it around, don’t close unused credit cards as a short-term strategy to raise your score and don’t open a number of new credit cards that you don’t need to increase your available credit.
Length of Credit History
Approximately 15% of your credit score.
In general, a longer credit history will increase your score. However, even people with short credit histories may get high scores, depending on how the rest of the credit report looks. Your score takes into account:
How long your credit accounts have been established, in general. The score considers both the age of your oldest account and an average age of all your accounts.
How long specific credit accounts have been established.
How long it has been since you used certain accounts.
New Credit
Approximately 10% of your credit score.
People tend to have more credit today and to shop for credit — via the Internet and other channels — more frequently than ever. Fair, Isaac scores reflect this fact. However, research shows that opening several credit accounts in a short period of time does represent greater risk — especially for people who do not have a long-established credit history. This also extends to requests for credit, as indicated by "inquiries" to the credit reporting agencies — an inquiry is a request by a lender to get a copy of your credit report.
The Fair, Isaac scores distinguish between searching for many new credit accounts and rate shopping, which is generally not associated with higher risk. In part, this is handled by treating a grouping of inquiries — which probably represents a search for the best rate on a single loan — as though it was a single inquiry. Your score takes into account:
How many new accounts you have. The score looks at how many new accounts there are by type of account (for example, how many newly opened credit cards you have). It also may look at how many of your accounts are new accounts.
How long it has been since you opened a new account. Again, the score looks at this by type of account.
How many recent requests for credit you have made, as indicated by inquiries to the credit reporting agencies. Note that if you order your credit report from a credit reporting agency — such as to check it for accuracy, which is a good idea — the score does not count this. This is considered a "consumer-initiated inquiry," not an indication that you are seeking new credit. Also, the score does not count it when a lender requests your credit report or score in order to make you a "pre-approved" credit offer, or to review your account with them, even though these inquiries may show up on your credit report.
Length of time since credit report inquiries were made by lenders.
Whether you have a good recent credit history, following past payment problems. Re-establishing credit and making payments on time after a period of late payment behavior will help to raise a score over time.
To increase your score do your rate shopping for a given loan within a short period of time. FICOâ scores distinguish between searches for a single loan and searches for many new credit lines, in part by the length of time over which inquiries occur. Re-establish your credit history if you have had problems in the past. Opening new accounts responsibly and paying them off on time will raise your score in the long run.
Types of Credit in Use
Approximately 10% of your credit score.
The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It is not necessary to have one of each, and it is not a good idea to open credit accounts you don't intend to use. The credit mix usually won't be a key factor in determining your score — but it will be more important if your credit report does not have a lot of other information on which to base a score. Your score takes into account:
What kinds of credit accounts you have, and how many of each. The score also looks at the total number of accounts you have. For different credit profiles, how many is too many will vary.
Apply for and open new credit accounts only as needed. Don’t open accounts just to have a better credit mix – it probably won’t raise your score. Have credit cards – but manage them responsibly. In general, having credit cards and installment loans (and making timely payments) will raise your score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
Credit Report Information
