Credit is probably the most scrutinized issue of qualifying that the bank will review. Not only does it indicate if a customer has a pattern of being late on financial obligations, but it gives an overall perspective to the bank of how seriously the potential customer takes his debt responsibility. The report will show inquiries made to the report in the last year. These inquiries may be signs that the customer has been out shopping for additional credit. For people with questionable credit to begin with this is a definite red flag. Overall, it is always a good idea to keep your credit report up to date and clean. You are entitled to one copy of your report per year for each of the three reporting agencies (Trans Union/Experian/Equifax). We recommend you order from Annualcreditreport.com, which is the only official site explicitly directed by Federal law to provide them.
Credit Scoring Factors
Credit scoring is based on a series of complex algorithms which take into account over 200 different factors. Some of these factors include, but certainly are not limited to:
- Payments made more than 30 days past their due date
- The amount of credit already granted to the customer
- The amount of credit currently in use by the customer
- The number of inquiries in the last year
- Bankruptcies, Foreclosures, Judgments
Can I Remove Negative Items From My Credit Report?
All derogatory information will generally stay on your credit report until they are cleared up. Once cleared and paid, it will take an additional seven years to completely remove them from your report, except for bankruptcies and foreclosures, which stay on for ten years past their discharge date. The lender will always allow for some leeway on your report when qualifying you, but keep in mind that every late is scrutinized, especially mortgage rates from the last 2 years. Before applying, it is always a good idea to allow your loan officer to pull a copy of your report to see if there will be any issues that may come up to prevent you from qualifying under “A” credit standards.
Many times, the lender may request that you write an explanation for any rates that may show on the report. Generally, it is not a good idea to say that you forgot, or that 3 checks in a row were lost in the mail. Generally, reasons that the underwriter is looking for would include short-term traumatic life incidents that caused you to fall behind such as an illness, loss of job, or unexpected major necessary expense that came up around the time of the latest.
What If I Don’t Qualify?
If you cannot qualify for one reason or another under “A” credit, the loan officer may be able to point you in the direction of a government-sponsored FHA mortgage or a “B/C” credit loan. Though the terms may not be quite as favorable as conventional financing, these types of loans will carry more relaxed credit guidelines and qualifying ratios and they may help you get into the house that you would not normally be able to. Once your credit has had time to “season” you may be able to come back and refinance your loan to “A credit” in a year or two. Just make sure you keep strictly disciplined with paying bills on time until then.
Finally, some lenders may be able to provide you with alternatives for increasing your credit score during the loan application process in order to get you access to better rates or terms. Consult with your chosen lender to see if this is an option.