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Credit
Q & A | How to Obtain your Credit Report

Your ability to manage credit is an important factor in determining if you will repay your mortgage loan. How does the lender decide if you are a good credit risk? During the loan application process, the lender will obtain a credit report on you and any co-borrowers. Credit reports are provided by credit reporting companies (most commonly known as credit bureaus). They provide information about how you have managed debt, including:

  • How much and what types of credit you use, such as credit cards, auto loans, or other consumer loans;
  • How long you have had and used credit; and
  • How promptly you pay your bills.

    The three major sources of credit information about consumers are Equifax, Trans Union, and Experian. More than likely the lender will obtain your credit record from one or more of these credit bureaus. The lender will evaluate this information to determine whether or not you are likely to repay the mortgage loan in a timely fashion. Before you apply for a mortgage loan, you should obtain a copy of your credit report (which you can order online) to see if the information in it is complete and accurate. Checking your credit report as early as possible will help you make sure the lender is getting information that is accurate and up to date.

    Questions and Answers about Credit Scoring

    What is a credit score?
    A credit score, more specifically, a credit bureau score, is one of many pieces of information that the lender will use when evaluating a mortgage loan application. A credit score is a summary of a borrower's credit report and a numerical measurement that reflects a borrower's management of credit. Your credit score is based on the records compiled by credit bureaus and includes the information reported each month by your creditors, such as the amount of existing credit you have and your payment history. A credit score considers all of the information in the credit report and converts this information into a number that helps the lender determine the likelihood that you will repay your loan on time.

    Credit scoring is an objective process, based only on the information in your credit report. Factors such as age, race, religion, gender, national origin, marital status, your income, employment, and where you live are not considered in determining your credit score.

    Is credit scoring new?
    Banks and other lenders have used credit scoring for more than 30 years for credit cards and other types of consumer loans, such as automobile and home equity loans. Now, credit scoring is being used in mortgage lending.

    Why are credit scores used?
    Lenders want to extend credit to people who will pay them back, and pay them back on time. They also want to be objective in making lending decisions. In order to approve your application for a mortgage loan, your lender must evaluate and understand many different risk factors, including your ability to repay the debt as well as how you have managed credit in the past. Because borrowers' credit histories can range from being very simple to being very complex, it is sometimes difficult to determine whether a given credit history is acceptable or unacceptable, or whether certain information represents a strength or a weakness.

    By using credit scoring, a lender can quickly and objectively evaluate your credit history in a consistent manner, and determine the likelihood that you will repay the loan as agreed. The use of credit scores not only improves the accuracy of the analysis of your credit history, but does so in a way that enhances the efficiency and consistency of the underwriting process.

    How does a lender get my credit score?
    When you apply for your mortgage loan, you will give your lender permission to check your credit history with the various credit bureaus. More than likely, the lender will obtain your files from the major credit bureaus: Equifax, Trans Union, and Experian.

    In addition to obtaining a credit report, the lender can also request a credit score. Your score is calculated by the credit bureau - not your lender - and is based only on the information contained in each of the credit bureau's files.

    How is my credit score determined?
    A credit score is based on information in your credit report, including information about how you have handled debt and credit accounts in the past. The calculations that make up a credit score are developed by looking at the way millions of consumers manage their credit. Credit scores have proven over time to be a reliable indicator of whether or not a consumer would repay a loan.

    A score is determined by summarizing a number of factors in your credit report. These include:

  • Payment History. How have you paid your debts? How often have you paid your bills after they were due? How you paid your bills in the past gives the lender some indication of how you can be expected to pay them in the future. If you have a record of paying your bills after the due date, this can lower your score. How often you have been late paying your bills, how recently your payments have been late as well as how long you remained delinquent on any bill at one time are important factors.

  • Outstanding Debt. How many consumer loans and open charge accounts do you have? What are the current balances on these accounts? The lender wants to know how much credit you have and how much you have used. Research has shown that the number of credit accounts you have as well as how much of your available credit is used is important.

  • Credit History. How long have you had credit? Generally, the longer you have had and have successfully managed credit, the higher your credit score. However, people with relatively new credit histories or those with only one or two accounts can obtain high scores as well. If you have recently established credit or have only a few credit references, that does not mean that you cannot get a mortgage. Working with your mortgage lender, you may be able to establish a "nontraditional" credit report that is based on how well you have paid other types of debts, such as rent and utility payments.

  • Credit inquiries. How many times have you authorized a lender to check your credit record? How many new accounts have been opened recently? Every time you apply for credit - for an automobile or consumer loan, to open a new charge account, etc. - the lender checks your credit history with one of the credit bureaus. This is called an "inquiry" and is recorded in your credit report. Sometimes, having many inquiries within a recent period on your file indicates that your credit usage may be increasing and creates an additional level of risk for the lender. However, don't worry that checking with several lenders about a mortgage loan will have a negative effect on your credit score. The credit report data used to calculate credit scores does not include auto or mortgage loan inquiries that occur in the 30-day period prior to the score being calculated, and auto and mortgage inquiries that occur in any 14-day period are always considered one inquiry.

  • Types of Credit. What types of credit do you have in use? Do you have a mixture of types of credit, such as credit cards, personal loans, etc.? Your credit score is calculated based on your history in these and other areas. Having established credit, paying your bills on time, and keeping the balances on open accounts to moderate levels will help ensure that you have a strong credit history and a good score.

    Are credit scores discriminatory?
    No. Credit scoring is an objective process, based only on the information in your credit report. Factors such as age, race, religion, gender, national origin, marital status, your income, employment, and where you live are not considered in determining your credit score. Credit scoring is a bias-free tool that helps lenders evaluate the likelihood that you will repay the loan based on how you have managed debt in the past. Because credit scoring evaluates the information in credit reports in the same objective manner, one borrower is just as likely as another to have a high credit score.

    What's my score? Is that good or bad?
    Credit scores typically used in mortgage lending range from about 300 to 900. Generally, the higher your credit score, the less risk of future default you represent to the lender. This is a strong indication that you have successfully managed credit in the past and are likely to repay a mortgage loan.

    Keep in mind that your credit score is only one factor that the lender uses to evaluate your mortgage loan application and that the final decision whether or not to approve your mortgage loan is made by the lender after careful analysis of all of the information the lender has collected.

    Can my score be improved?
    The answer is, over time, certainly. But it may be difficult to immediately "fix" your credit score. The most effective way to make sure that you have the best possible credit score is to manage the credit you already have in a responsible manner. You can do this by following two simple rules.

    1. Avoid becoming delinquent on any of your credit obligations (credit cards, automobile loans, or other installment loans). Consumers occasionally miss a payment on one of their bills. This can happen for any number of reasons. Isolated situations like these, although they should be avoided and will have some effect on your credit score, should not have an effect on your ability to get new credit. However, lenders do consider consumers who establish a pattern of frequently paying their bills late to be greater credit risks than those who pay on time. As a result, lenders often are reluctant or unwilling to extend new or additional credit to these consumers. Credit scoring reflects not only this concern, but the actual experience of lenders.

    In addition, filing for bankruptcy, having your car repossessed, or having a mortgage foreclosure on your credit report will have a major effect on your credit score and your ability to get new credit in the future.

    2. Avoid overuse of your credit cards and other credit accounts. Just as it is important for you to pay your bills on time, it is also important that you control how much money you owe, especially on your credit cards. Lenders are increasingly concerned about the credit risk of consumers who seem to overextend themselves by using most or all of their available credit - even if these consumers are still making payments on time.

    Why would the lender need to be concerned if you are still making your payments on time? In recent years, there have been many news accounts of people in financial difficulty because they have used their credit cards up to their maximum limits and then struggled to make their monthly payments. For some consumers in this situation, the burden of these monthly payments becomes so great that they stop making payments altogether. Some file bankruptcy. This can happen to people who have never before missed a payment.

    So, while you may think everything is fine - no matter how much you charge - as long as you can pay your monthly bills on time, the fact is that you are actually a higher credit risk than those that manage their credit accounts more conservatively.

    Credit scores are developed by looking at the way millions of consumers manage their credit and are able to identify consumers who are becoming overextended, before they become delinquent. This risk is reflected in the credit scores of those consumers.

    What if I don't have any credit references on my credit report or just a few accounts? Will I have a credit score? Will I be able to get a mortgage loan?
    You can obtain a mortgage loan even if you have limited credit references or no credit at all on your credit report. It is also not a requirement for you to have a credit score in order to obtain a mortgage.

    Even if you have limited credit - as little as one credit reference - a lender can still obtain a credit score for you. If you have little or no credit references on your credit report, the lender will work with you to develop what is called a "nontraditional" credit report that will contain information on how you manage financial obligations like rental payments, utility payments, and other items that do not normally appear on a credit report.

    Will my lender tell me my score?
    The decision is up to the lender and they are not required to share credit scores with borrowers. The lender can tell you if a credit score was used as part of the decision to approve or deny your loan. If your loan is denied, the lender can help you understand what reasons caused the denial and what you can do to get on the path to homeownership.

    How do I know if the information used to calculate my credit score is correct?
    Your credit report reflects the information reported to the credit bureaus by each of your creditors. This information changes every time something is added or deleted from your credit file. For instance, paying off an existing account, opening several new accounts, or exceeding the credit limit on one of your accounts will be reflected in your credit record.

    Sometimes credit reports are inaccurate. There are also situations in which the time between when you open or close an account or make a payment and when this information is updated in your credit report makes it appear your credit report is inaccurate. The best way to ensure that the information contained in your credit files is correct is to periodically request copies of your credit report. Each credit bureau keeps its own records, so you may want to request copies from all three: Trans Union, Equifax, and Experian. Credit bureaus generally charge a small fee for a credit report; however, some states now require that they give free or discounted reports.

    In addition, if you have been turned down for credit because of information contained in your credit report, you are entitled to receive a free copy of your report within 60 days of the denial. If you think your report contains mistakes, notify the appropriate credit bureau. They will investigate the item and remove any incorrect information. If information in your credit file changes, your lender may want to request another copy of the report and a new credit score. Keep in mind, however, that making changes to your credit report may not change your credit score.

    If there are errors in my credit report, do I have to wait for them to be corrected before applying for a mortgage?
    No. If you have reviewed your credit report and found errors, you should contact the credit bureau immediately and get it to correct the information. You still can apply for a mortgage while this information is being corrected. Just explain the circumstances to the lender and explain that the credit bureau is correcting the information. If you already have applied for a mortgage loan, your lender still can evaluate your credit report and your loan application without a credit score by reviewing the information that is correct in your credit report.

    What if my credit report shows late payments or other problems that have since been resolved?
    Your credit report provides the lender with information about how you manage debt. Any history of late payment or other problems will be reflected in your report for a period of time. Sometimes there are circumstances - such as an illness or job loss - that can prevent a borrower from paying his or her bills on time. When the person gets well or gets a new job, payments can resume as agreed. Although the credit report will still reflect the late payments, you should explain the circumstances to the lender as well as the steps that have been taken to correct the problem. The lender will consider all of this information in making the final decision.

    Who makes the final decision? Will a computer make the decision or approve or deny a mortgage loan?
    Absolutely not. Automated underwriting and credit scores are tools that help the lender evaluate all of the information gathered about you, your financial situation, your credit history, and information about the value of the property you plan to buy.

    The final decision whether or not to approve or deny your mortgage loan application is made by the lender, not a computer. The use of these tools, combined with solid underwriting knowledge, makes the process of underwriting a loan faster, more efficient, more objective, and less expensive for the home buyer.

    The use of credit scoring and automated underwriting are part of a careful, comprehensive analysis of the unique characteristics of each individual mortgage application. By providing a measurable evaluation of a borrower's ability and willingness to repay the loan, the use of these tools gives lenders a greater ability to identify the borrowers who have demonstrated that they are capable of managing their finances and would be successful at homeownership.

    How to Get a Copy of Your Credit Report

    It is recommended that you obtain and review a copy of your credit report before you begin the mortgage loan process. To obtain a copy of your credit report, contact the following credit bureaus via World Wide Web or by phone:

    Equifax: (800) 685-1111; http://www.equifax.com
    Trans Union: (800) 916-8800; http://www.tuc.com
    Experian: (800) 682-7654; http://www.experian.com

 

 

 

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