Credit History

One of the many terms mentioned throughout the mortgage loan process is credit and credit history. You may find yourself asking at some point; "What exactly is credit? Do I have a credit history? Is it good? How will it affect my loan?" The answers to these questions are often not complicated; however they are crucial to understanding the mortgage loan process and how to go about obtaining one. Quite possibly, a home is the biggest investment you will make in your lifetime, and for this reason lenders, credit scoring and automated underwriting systems weigh an applicant's mortgage and credit history very heavily.

Credit Report

Your credit report rates your past and current mortgage payments, verifies other debts, and demonstrates your ability to pay debts on time and how long you have until they are paid off. Most credit scoring systems use your mortgage payment history as the primary determinant in assessing your credit quality. If there is any history of late or non-payments, it will have a negative affect on your credit for at least two years. Credit reports also reveal how many times a credit report has been run on you. Scoring systems historically have assumed you have been turned down if you have had numerous reports ordered on you within the last six months. Numerous requests for credit have had a negative impact on your score in the past, but might not have as much negative impact in the future because of improvements in the scoring system.

Installment and Revolving Payment History

If you have not established a mortgage history, the next item lenders will look to is your installment and revolving payment history, (typically lenders require that you have at least five accounts established for a minimum of two years). A credit report will let the lender know if there is record of any liens, judgments, collections or if you have filed bankruptcy. It is important that you have a credit history so that lenders have a method of predicting, based on your payment records, that the mortgage loan will be repaid. Common sense tells us that those who have paid their bills and rent on time in the past are more likely to do so in the future. Thus the interest rates are for A quality borrower programs, sometimes referred to as conforming programs (loan amounts of $275,000 or below) and nonconforming (loan amounts above $275,000), are made available to those with excellent credit. If you have not yet had the opportunity to establish any credit, i.e. credit cards, auto loans or gas/department store cards, you can do so by documenting any monthly bills you have paid in the past such as utilities and rent.

Evaluating Credit

There are three methods to how lenders evaluate credit; grading, scoring, and automated underwriting. Lenders will actually grade your credit quality (A through D) depending on the frequency and severity of any overdue payments. Credit scoring is an automated process calculated at the time a credit file is accessed from the credit bureau. The score is meaningless by itself and must be used in conjunction with a cut-off strategy, (i.e. your score should be somewhere above 620 for an A quality loan and the higher the better). For mortgage lenders, the purpose of using FICO scoring is to speed the mortgage loan review process, to reduce the cost of examining a credit report, and to determine if the file could be submitted to automated underwriting. Automated underwriting incorporates your credit report in the underwriting decision. Fannie Mae will issue five possible decisions from its automated Desktop Underwriter system. The decisions are based on two parts, first the credit worthiness of the borrower (approve or refer) and second the details of the transaction (eligible or ineligible). They are as follows: approve/eligible, approve/ineligible, refer/eligible, refer/ineligible, and refer with caution.

Imperfect Credit

Situations arise however, sometimes unavoidable, that prevent consumers from timely payments. Illness, divorce and temporary financial dire straits are all common occurrences that can transpire through a lifetime and can directly affect your ability to pay bills on time. Will consumers be forever penalized for a couple of missed or late payments? Fortunately, time will heal your credit injuries as long as you have reestablished a timely payment history. Lenders are realizing the need for more flexible loan programs that allow for a variety of payment histories and credit ratings. If you know or suspect that your credit report will show any delinquent recordings, it's a good idea to obtain a copy to see where you stand. The rates for alternative credit programs can vary, depending on your grade and/or score, anywhere from one to four percentage points higher than the conforming program rates, which are usually the rates that are advertised.

Know Your Credit History

Your credit can be a mystery, but it doesn't have to be. The more awareness and knowledge you have about your own history and quality rating, the better prepared and informed you will be when you make the decision to obtain a mortgage. If you're interested in determining your credit quality grade for the purpose of obtaining a mortgage loan.