Credit Reporting and scoring – History and Tips
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/credit bureaus. They provide information about how you have managed debt, including:
The three major sources of credit information about consumers are Equifax, Trans Union, and Experian. Lenders will obtain your credit record from all three 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.
How does the mortgage lender evaluate the information in the
credit report? One way is through credit scoring.
What is a credit score? 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. 00 is the lowest possible score, 900 is the highest. 680 to 700 is considered excellent, and less than 620 is typically considered sub-rime, though if there are errors on the report, this would be considered.
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 over 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 is 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 will 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.
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