Mortgage 101 - Credit Reports

mortgage process

 

 

Credit Reports

When applying for a home mortgage, you must be knowledgeable of your credit history. The best practice is for your credit check to occur during our pre-qualifcation process. If any credit issues need your attention, the best time to do it is before formal loan application.

A credit report is comprised of data from the three US consumer credit reporting agencies: Experian (EX),  Equifax (EQ) and Transunion (TU). It is a snapshot of how you paid companies that lent you money and how you met your financial obligations. We focus on certain categories of information there:

  • Identifying Information
  • Credit Information
  • Public Records
  • Inquiries

What is NOT included in your credit profile is: race, religion, health, driving record, criminal record, political preference, or income.

If you have credit issues, be prepared to discuss them honestly with your Houston Capital lending officer. We are empathetic and know that legitimate reasons exist for credit problems, such as unemployment, illness, divorce, or other financial difficulties. If your issues are behind you and payment history is timely now for at least one year, your credit may be deemed satisfactory for lending.

Your credit is graded in areas such as: payment history, amount of payments, bankruptcies, credit scores, etc. Credit scoring is a statistical method of assessing the risk of a mortgage application. The score looks at: delinquencies, credit behavior, debt levels, length of credit history, types of credit and number of inquires. We have no way to calculate a person's score manually; as it is automatically calculated by each bureau and changes every time credit is checked.

The most common terminology for credit scoring is called the FICO score. This score was developed by Fair, Isaac & Company, Inc. for the three credit bureaus; Equifax (Beacon), Experian (formerly TRW), and Empirica (TransUnion). FICO scores come from each repository that consider information contained in a person's credit file. 

Five factors behind credit scores:

  • 35% of score is payment history
  • 30% of score is amount owed
  • 15% of score is time of established credit
  • 10% of score is type of new credit sought
  • 10% of score is types of credit held

Credit scores are used in guidelines for loan programs and for determining your interest rate. Many people are skeptical about the accuracy of scores. Scoring has been part of the mortgage process since 1999. However, scores have been used since the late 1950's by retail merchants, credit card companies, insurance companies and banks in consumer lending. The data gathered from large scoring projects (mortgage portfolios) demonstrates the ability of scores to predict behavior and that scores work.

Ways you can maintain & improve scores:

  • Pay bills on time
  • Keep credit balances low 
  • Keep zero balance accounts open for scoring  
  • Check information for accuracy
  • Minimize inquiries
  • Keep credit active
  • Resolve credit disputes

Scores 740 and above are considered high quality borrowers, and qualify for the lowest possible interest rates.

Scores of 700- 739 are good, but do encounter slightly increased interest rates.

Scores 680 to 699 are average, and encounter greater impact to interest rates.

Scores below 680 require a closer look at risk, have financing & program limitations, and higher rates.

620 is today's benchmark for mortgage financing. Borrowers with credit scores below 620 encounter difficulty obtaining loans at competitive terms. In times past, below 620 was referred to as "sub-prime" financing. These loans are less available in today's market. It is worth your time and effort to work on raising scores above 620 in anticipation of getting a mortgage.

All things equal, when you have credit issues, all other aspects of your loan must be exemplary. Late mortgage payments, bankruptcies or foreclosures present major lending challenges. Remember, credit is the major piece of the puzzle to determine "willingness to pay" .

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