If you are worried about your credit history, you can take charge of your situation by getting the facts and taking the actions necessary to improve your chances for a mortgage approval. Improving your credit will also help you get a better credit score which means lower rates and lower down payments required.
With on-line access to your credit report from all three credit bureaus, getting to a higher credit score is easier than in the past.
Many consumers have faced difficulties that resulted in credit problems. The good news is that a consumer is no longer banned from obtaining a mortgage or other new credit even with bankruptcies and foreclosures.
The primary purpose of a credit report is to establish that a borrower has a sufficient and satisfactory credit history for the loan requested.
The secondary purpose is to develop a complete summary of current debts that a consumer must pay each month. Credit reports also list any bankruptcies, foreclosures and legal judgments against a consumer.
When applying for a mortgage loan, there are specific guidelines established by mortgage institutions such as Federal National Mortgage Association (FNMA) for obtaining a conventional mortgage loan. These guidelines specify, “The borrower’s credit history should demonstrate his or he past willingness and ability to meet credit obligations that will show the borrower’s commitment to making payments on the new mortgage being considered.”
Underwriters are more concerned about a borrower’s overall pattern of making payments than they are about a few individual occurrences. “A borrower who has made payments on outstanding or previous credit obligations according to the contractual terms will have a credit history that consists of no late payments and no adverse or derogatory information (such as bankruptcies, judgments or collections). To make sure that a borrower who has an otherwise good payment history is not penalized for an occasional late payment, we do not require perfect or spotless credit records.”
While usually accurate, credit reports often contain errors and mistakes. In the past, credit histories were a closely guarded secret and consumers could only guess if they were denied credit by accident or due to incorrect information. Today, consumers can obtain exact copies of their credit histories from the major credit reporting bureaus.
Whenever consumers are denied credit , they can obtain a copy of their credit report to challenge and correct any errors or mistakes. For instance, if a borrower has a common surname or family members are Jr., Sr., III etc., he or she will be able to separate the accounts from family members or people not even related to the consumer.
A borrower should contact all three of the major credit bureaus directly to correct any errors appearing on reports from each of those credit bureaus. Each credit organization will send you a free copy if you have been denied credit. Otherwise a small charge may apply. You can contact each credit bureau as follows:
- Experian: www.experian.com
- Equifax: www.equifax.com
- TransUnion: www.transunion.com
Each of these sites has information about getting a copy of your credit report directly and also for joining their credit monitoring services. These sites might be helpful if you have issues to repair and plan on buying or refinancing soon.
A borrower preparing to apply for a mortgage loan should take several steps to maximize chances of approval and prevent unnecessary delays. First, list all current debts, including monthly payments, total balance and type of loan (installment, revolving etc.) to determine what should appear on the credit report.
Second, get the facts. Contact all three credit bureaus listed above for a copy of each separate credit report. Each bureau will send a copy of the credit report, but the inquiry will not show up on the credit report as an inquiry because it was for the consumer. Each report will include a dispute form to challenge any incorrect information. Complete the dispute form for any items with which there is a disagreement and send it to each credit bureau.
When credit reports have been obtained review the monthly payment history for each account. As long as the majority of a borrower’s credit demonstrates a satisfactory credit history, a few minor delinquencies should not prevent approval for a mortgage, car loan or credit card. However, consumers should take three steps to insure that their credit report is reviewed in the most favorable light possible:
1. All credit delinquencies, no matter how minor, should be explained in a satisfactory manner to the lender. For delinquencies over two years old, the explanations can be brief. For credit delinquencies in the past two years, the explanations must be detailed as they may affect loan approval.
2. All credit inquiries (by other grantors of credit) that appear on a credit report should be explained by stating the purpose of the credit request, whether credit was granted or not, and the current terms. A large number of inquiries on a credit report reflects negatively because it appears to the lender that the borrower has applied to other institutions without success.
3. All charge-offs, liens and unpaid judgments, no matter how small, must be paid and shown as paid on all credit reports prior to obtaining a loan approval.
If the payment history still reflects many late payments in the past twelve months, a consumer may need to consider making on-time payments for at least twelve months before applying for a mortgage loan. As an alternative, there are now loan programs available that can assist borrowers who have had credit difficulties. These programs allow borrowers to make down payments as low as 15% and obtain a loan immediately. These loans carry higher interest rates because of the higher risk. However, if a borrower can maintain excellent credit for twelve to twenty four months with the new mortgage, he or she can refinance the loan into lower rates later.
Over the past several years, several companies have sprouted up claiming to be able to “repair” consumer credit reports. “Repair” is a euphemism for “alter” with these organizations, which attempt to use loopholes in the Fair Credit Reporting Act to bully creditors and credit bureaus into changing correct information. Consumers should be aware that the Federal Trade Commission announced recently that “there are no legitimate credit repair organizations in the United States.”
In fact, all consumers now have the direct access, procedures and legal rights to analyze, dispute and correct their credit histories. For consumers looking to obtain credit of any kind in the future, it pays to start preparing now.
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