| Learn: Understand Your Credit | In this Section: |
ORDER A CREDIT REPORT
The first think you need to do is get a copy of your credit report. Make sure you get the credit scores and the report for all 3 bureaus: Equifax, Transunion, and Experian. Below are a few options for you to get your credit report. Some offer credit monitoring services as well.
- Order a 3-BUREAU CREDIT REPORT from CreditReporting.com for $34.90.
- 3-in-1 Credit Report, 3 Credit Scores, 3 Bureau Monitoring. $24.95 for 3 months at www.identityguard.com
- See your Personal Credit Report and Credit Score Online - Free
at OnlineCreditInfo.com
- 3 Bureau Online Credit Report at ReliaCredit.com
A new federal law called the Fair and Accurate Credit Transactions Act (the Fact Act) entitles you to one free credit report from each credit reporting agency per year. You can request your three reports, in accordance with this new law, by going to www.annualcreditreport.com which is the only authorized source for consumers to access their annual credit report online at no charge. You can also request your reports by phone by calling 877-322-8228. I prefer to request the reports online because you can get them in about 5 minutes. But keep in mind that the new law only requires the reporting agencies to give you your credit report, not your credit score. So, if you want your score from each bureau, you'll have to pay about $5 for each score. It may or may not be worth it to you, but I like to know what the actual score is that each agency is reporting. Also, keep in mind that if you got a free credit report within the last 12 months under this new law, you'll have to pay for your report. |
MORTGAGE CREDIT REPORT vs. CONSUMER CREDIT REPORT
Mortgage companies use a different scoring system than auto dealerships and credit card companies. Simply put, they weigh mortgage history more heavily that the others do. So just because you run credit with one of the three credit bureaus and receive a score of 650 does not mean that is what a mortgage company will find as well.
MINIMUM CREDIT SCORE NEEDED
The higher your credit score is the better your interest rate and loan-to-value maximum will be. The minimum acceptable score throughout the mortgage industry is 500 and to receive a 100% loan-to-value loan (no money down) you will need at least a 580. The chart below shows total financing and what your middle FICO score needs to be.
| Total Financing (Loan-to-Value) | Score |
| 100% | 580 |
| 95% | 560 |
| 90% | 540 |
| 85% | 520 |
| 80% | 500 |
Note: These numbers are guidelines only. Actual guidelines can change at any time.
THE 3 MAJOR CREDIT BUREAUS
The following are the 3 major credit bureaus that report your credit score when applying for a mortgage.
| Experian National Consumer Assistance Center (Formerly TRW) P.O. Box 2104 Allen, TX 75013-2104 (888) EXPERIAN (397-3742) http://www.experian.com |
EQUIFAX Credit Information Services P.O. Box 740241 Atlanta GA 30374 (800) 997-2493 http://www.equifax.com |
Trans Union Corporation P.O. Box 390 Springfield, PA 19064-0390 (800) 888-4213 http://www.transunion.com |
HOW YOUR CREDIT SCORE IS DETERMINED
The mortgage company will pull what is called a tri-merge credit report. This means they are pulling a report from each credit bureau and merging them into one report. At the top of the report are the three credit scores, one from each bureau. The loan officer will disregard the high and low score and only use the score in the middle. (see example below)
Credit scores come from a complex formula that factor in your payment history, number and size of tradelines, collections accounts, bankruptcies and any other items reporting to the credit bureau. Each credit bureau has their own formula which is why you have three unique scores.
- Payment history — what is your track record? 35 % of the score
- How bad are the delinquencies?
- Recency – how recent are they?
- Frequency – how many times did it occur?
- Amounts owed — how much is too much? 30% of the score
- Large outstanding balances
- The ratio of balances to credit limits
- Length of credit history — how established is yours? 15% of the score
- Age of the trade lines - (the age of the oldest account, the average age of accounts, or both)
- Age of the trade lines - (the age of the oldest account, the average age of accounts, or both)
- New credit — are you taking on more debt? 10% of the score
- Number of inquiries and new account openings
- Number of inquiries and new account openings
- Types of credit in use — is it a healthy mix? 10% of the score
MIDDLE SCORE EXAMPLE : 598
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SCORE RANGES
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TRADELINES
A tradeline is a line of credit that a lending institution has approved you for that appears on a credit report. The loan officer will look for how many tradelines you have and look to see if they are they currently active, how old they are, their size and payment history.
This may sound a little scary if you have had poor credit or came out of a bankruptcy past but there are several loan programs that offer much flexibility when it comes to your tradelines. In fact some programs do not require any active tradelines and will disregard your late payments!
Tradeline Requirements
The requirement for tradelines varies widely depending on the type of loan you are going after. Generally speaking, if you have three to five active tradelines you have paid on time for the last two years you can go anywhere for your loan. However, most of our clients are not in that position. Ideally, you should have three tradelines, one with at least 24 months of payment history. If you do not, as mentioned above, there still are programs for you.
MORTGAGE HISTORY
The past 12 months of your mortgage or rental history are key, equal in importance to your credit score. Your rental history will not show up on credit report.
You will be asked what your latest payment was on your mortgage during the last 12 months. With mortgages and other credit you are not considered late until you pay 30 days after the due date. For example if your mortgage was due on March 1 st and you paid it March 30 th you are not considered late on your credit report. However, if you paid April 1 st you would be declared 30 days late.
Therefore, in the mortgage industry lates are categorized into the following: over 30 days late, over 60, over 90 and over 120 days late. The later you have been on you mortgage payment the higher your interest rate and lower your maximum loan-to-value will be.
The main action you must take is to pay your mortgage before 30 days from the due date come up. Also make sure to pay by check so you can prove your payments were made and the date they were made.
We also suggest you can contact your mortgage company and request a “mortgage rating.” This is your official mortgage history according to the mortgage company and often contains mistakes. Typically they will fax or mail the rating to you within 48 hours. Once you receive it review it for mistakes. If you find any contact the mortgage company by letter, disputing the error and giving evidence to support your claim (canceled checks).
PUBLIC RECORDS
There are five types of items that can show up in this section on your credit report, bankruptcies, foreclosures, judgments, tax liens and garnishments. If you have any of these items you may be thinking any one of these items on your credit report will prevent you from receiving a home loan. In some cases you would be correct. However, there are many loan programs that allow for these items. Of course your interest rate will be a littler higher than if you did not have any of these items but you can still get your home loan.
Let’s take each type of public record separately:
Bankruptcy
The two types of bankruptcy normally showing up are Chapter 7 and 13. If you have a bankruptcy in your past take a look out our bankruptcy addendum for more information and strategies for receiving the best home loan.
With a Chapter 7 the key date being looked at is the discharge 3 date. For the best interest rates there is a three year waiting period after the discharge date. However, there are several programs that will allow for you to get a home loan one day after a Chapter 7 Bankruptcy discharge.
If you are attempting to purchase a home while still in a Chapter 13 bankruptcy you can get a home loan but the rate will be extremely high and you will have a 30% down payment. If you have discharged your Chapter 13 your filing date will be the key date considered. The longer it has been from your filing date the better your interest rate and maximum loan–to-value will be.
Foreclosures
To begin with, you need to know if you had your home foreclosed while going through a bankruptcy the mortgage industry still sees that as a foreclosure. Otherwise, a foreclosure is one of the most serious credit issues that needs to be overcome by a home loan borrower. Most programs have at least a three year waiting period for loan approval after a foreclosure. However, there are several programs that will approve for a home loan months after a foreclosure. There is even one program that allows 100% loan-to-value right out of a foreclosure.
Judgments
This where you have been taken to court, lost the case filed against you and now owe either a person or a business a sum of money. Sometimes these must be paid off before you can be approved and other times they are a non-issue. The key factors are how old the judgments are and how large they are. The older and smaller the judgment is the less likely they will become an issue.
Liens
These are liens filed against a property by the state you live or by the IRS for not paying income and/or property taxes. Most of the time these do not become a problem on purchase loan. However, when you go to refinance a property with a tax lien you will have to pay the lien off for the loan to be approved.
Collection Accounts
If you have not paid a creditor for a certain length of time, your account can go into collections. Some programs allow you to leave collections open, but its better to have these resolved before financing a home.