How Your Credit Affects Your Ability to Get a Mortgage
Frequently Asked Questions About Credit and Credit Reports
Your credit history and credit score go a long way towards determining the interest rate you will pay for your mortgage, the loan amount you may be eligible for, and the down payment you'll need to purchase your home. Here are the answers to some of the most common questions we hear about credit and credit reports.
1. What is a Credit Report?
A consumer credit report is a record of an individual's credit payment history. If you have always paid cash for everything, you may have no credit history.
When lenders review your credit report, they evaluate how much you already owe, how much unused credit you have available, how prompt you are in paying your debts and whether you've recently applied for new credit.
They may ask you to explain any late payments, recent inquiries on your credit report, or new accounts. If you have no credit accounts, they may ask you to show that you pay your rent, telephone bills or utility payments on time.
To prevent past errors from haunting you forever, most negative information is erased after seven years. This includes late payments, accounts that the credit grantor turned over to a collection agency and judgments filed against you in court --- even if you later paid the account in full.
Credit reporting agencies use the date of original delinquency or, in the case of public records, the date of filing to determine when negative information is deleted. Positive information remains on your report indefinitely.
Inquiries remain on your credit report between six months and two years, depending on the type of inquiry. (If the FBI accesses your credit report in connection with an investigation of issues such as counterintelligence, no record of that access will appear on your report.)
According to the Fair Credit Reporting Act (FCRA), anyone denied credit based on information contained in a credit file must be notified. The company that denied you credit will tell you from what agency they obtained your credit report and how you can get a copy (free of charge) if you request one within a reasonable time after receiving the denial letter.
2. How Can I Get a Copy of My Credit Report?
Approved.com now offers the ability for our clients to order copies of their credit report online. If your credit is less than perfect, you can also get some suggestions for improving your credit score. Click here for more information or to get started.
3. What is a Credit Score?
Your credit score (sometimes called a FICO score) is a measure of your ability to obtain credit. It is computed using a proprietary formula developed by Fair, Isaac and company, and is expressed as a number between 300 and 850, with a higher score meaning a better ability to obtain favorable credit terms.
Credit scores above 720 are generally considered to be near-perfect credit, while scores below 620 indicate sub-prime credit. The average credit score is around 680.
If your credit score is less than what you would like it to be, there are steps you can take that will quickly improve it. The most important thing is to pay your bills on time. One of our mortgage officers will be happy to review your credit reports and credit score, and provide additional tips for improving your credit.
4. How Does Bankruptcy Affect My Ability to Get a Mortgage?
There are several kinds of bankruptcy. An individual or business selects a specific type based on the amount of debt owed and other financial circumstances.
Chapter 7 bankruptcy, also known as straight bankruptcy, probably is the chapter most people think of when discussing bankruptcy.
When individuals file Chapter 7, most -- or all -- debts are canceled. In some cases, however, specific assets must be surrendered to a court-appointed trustee, who sells the assets to repay some of your bills. (Some or all of the value of your car, home, household furnishings, clothing and work tools are exempt.) When a business files Chapter 7, it closes, and the assets are sold to pay its bills.
Chapter 11 bankruptcy is used by companies more than by consumers. It allows companies to reorganize their business operations and continue to operate under the supervision of the bankruptcy court. (Consumers with very large debts also may file under Chapter 11.)
Chapter 12 bankruptcy, similar to Chapter 13, is specifically designed for family farmers.
Chapter 13 bankruptcy, sometimes known as a wage-earner bankruptcy, allows people with steady incomes to pay some or all of their debts back to their creditors under a court-approved repayment plan. Their assets are not sold to repay their bills. Sometimes small non-corporate businesses may file Chapter 13. Doing so provides a means of paying off debts with future earnings.
The length of time a bankruptcy remains on your credit report depends upon which chapter of bankruptcy you file. Chapters 7, 11 and 12 remain for 10 years. By policy of credit reporting agencies, a Chapter 13 bankruptcy, in which you repay part or all of your debts under a court-approved payment plan, remains on your credit report seven years.
5. What is PERFECT CREDIT?
- A record of paying all financial obligations on time, for many years.
- There should be only a few credit inquiries.
- There should be no bankruptcies nor liens.
- There should be several long-established credit accounts in the USA, no active lawsuits, not now in divorce proceedings.
6. What is GOOD CREDIT?
- A record of paying all financial obligations on time for the past few years.
- Bankruptcies and liens should have been discharged at least 24 months ago, and credit re-established.
- No active lawsuits, not now in divorce proceedings.
7. My CREDIT IS NOT GOOD. What difficulties should I expect?
The down payment may need to be increased (a lower loan-to-value [LTV] ratio). The interest rate may be higher (higher perceived risk, higher reward for lender).
Sometimes a second (junior) mortgage will help, especially if the LTV is lower due to the perception of a higher risk. This second mortgage is another loan against the house, but second in priority behind the primary or first mortgage. It could be offered by the seller (she takes an IOU instead of getting all of her cash at the closing).
If the borrower has imperfect credit and only 10% for the down payment, then the unexpected requirement of a 25% down payment (75% LTV) due to slow credit could kill the transaction unless the seller has the desire and the ability to hold a second mortgage.
8. I have all R1s and I1s on my credit report. Isn't that good enough?
In many cases the answer is "yes". However, most lenders may require a more thorough credit history. For example, were there any R2s or worse within the past 48 months? Do not worry. There are loans for you even if your bankruptcy was discharged yesterday.
9. Should I pay off all of my credit cards before I apply for a mortgage?
Probably NOT. Ask us.
10. My credit is perfect, but my husband's credit is bad. Can we use my credit only?
Yes, if we use your income only.
11. My credit report incorrectly states that I made late payments.
Please help your mortgage counselor by providing written information that will help correct this error.
Approved.com provides you with the information on this page as general suggestions but not specific recommendations. This information shown here is "as-is" without warranty of any kind and may not be applicable to the specific facts or circumstances of your personal financial situation or credit history and is not intended as a substitute for professional advice. In any real estate, legal or tax transaction, always use due diligence and consult your own attorney-at-law, personal banker, certified public accountant or financial advisor for advice, instruction, guidance and/or counsel. Caveat emptor.