HOW
LENDERS EVALUATE CREDIT
When
lenders evaluate a borrowers credit they look at several different
areas. The first, and
most obvious, is whether or not you satisfy your financial obligations
on time. This is
important because lenders view this as a preview of how you will repay
any loan they make to you.
In
addition to the punctuality of your payments, lenders also look at
your credit "depth". Too often consumers will accumulate large amounts
of debt in a very short period of time.
For this reason most lenders want to see a minimum of 2 years
established credit before they will consider you as a candidate for a
home loan.
Also,
in recent years lenders have begun using "Credit Scoring" as
a tool in qualifying for loans. A
credit score is a computer-generated number that lenders use to help
determine how great a credit risk you are.
When calculating your score, the computer looks at many risk
factors. The ultimate
score that is issued is a three-digit number that can range from the
low 200's to the high 800's. The
higher your score is, the greater the probability that you will
satisfy the debt in question. The
majority of the population scores between the high 500's to the high
600's. Those people with
credit scores over 700 are generally considered to be "A+"
credit.
One
of the benefits of having a Certified Loan Broker evaluate your credit
lies in their ability to service more than just the "A"
credit market. The
majority of Americans will experience some form of credit difficulties
throughout their life. Certified Loan Brokers can offer loan programs
to borrowers with a prior bankruptcy or tax lien. A Certified Loan
Broker is your best chance to get the loan you need if you have
experienced credit problems.
There
are many other areas which lenders will review to determine credit
worthiness. Many times
this information becomes the deciding factor when it is applied to a
marginal borrower.
Lenders
look primarily at the last 2 years when reviewing credit reports.
If you are requesting an "A" quality loan, then you
should have no more than 10% of your total credit report delinquent in
the last 2 years. This
rule, of course, may not apply to all borrowers depending on your
overall credit history. However all borrowers should not have missed any
mortgage or rent payments in the last 12 months if you want the most
competitive rates.
Lenders
also consider certain types of credit derogatories to be more severe
than others. It is
important to remember however, that any derogatory information
existing on the credit report will require a detailed explanation.
The following is a "scale of importance" used by
lenders when viewing credit derogatories:
On
Mortgage Loans, there are very few excuses lenders deem acceptable for
missing a mortgage payment. Lenders
will view these derogatories as a preview of how they can expect to be
repaid.
With
Auto Loans, most people need their car to get to work each day.
Most people need their job to make their mortgage payment.
Therefore, lenders feel that if you are missing your car
payments, you are jeopardizing your income, which is essential for
repayment of their debt.
A
Personal Loan is secured by a personal guaranty of repayment
(Commonly called Signature Loans). Sometimes there is additional
collateral taken such as "household goods" but the primary
security for this type of loan remains your "Word of Honor".
Revolving Debts, such as credit cards, usually do not
have fixed payment terms. Instead, the payment represents a percentage of the
existing balance, which can vary greatly from month to month. Because the terms are unstable, lenders are
slightly more forgiving towards a borrower with minor delinquencies of
this type.
The
most serious delinquency is on an existing mortgage.
This includes first or second mortgages and any other real
estate loan. Since the
applicant's loan request is for a new mortgage obligation, the
existing mortgage payment history is regarded as a direct indication
of the manner in which the borrower will handle the proposed mortgage
obligation. Most
guidelines indicate no more than one 30-day late payment on a mortgage
obligation can be reported within the past year.
Even in the case of one mortgage delinquency, an acceptable
explanation must be provided, and there must be no other serious
credit problems. A
Certified Loan Broker however has loan programs to match almost any
credit history.
Consideration
is often given to applicants with past credit problems that have been
brought current and have established that a re-occurrence of credit
problems would be remote. Some of the more acceptable credit explanations
relate to medical difficulties, job termination or changes beyond the
applicant's control, and in some cases, divorces.
With the exception of bankruptcies, negative credit ratings
remain on most credit bureau files for seven years.
Bankruptcies remain for a period of ten years from the date of
discharge.
It is important to get an opinion of your personal credit history from a Certified Loan Broker since every situation must be reviewed on its own merits.