Must know facts about mortgages–
1) Credit reports and payment patterns effect your mortgage
2) Credit usage affects your mortgage
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A person’s spending and paying behavior are reflected on the credit report, then those entries are analyzed and evaluated by FICO® proprietary scorecards to arrive at the score.
Along with Income and Assets, Credit is one of the 3 main factors considered when qualifying for a mortgage.
Payment History (35%) –
As the name implies, this category includes a person’s payment record. Accounts are separated into installment (fixed payment period, like a mortgage or car loan) and revolving (open-ended such as credit card).
Creditor companies report payments as :
* current / paid as agreed (positive for score)
* over 30, 60, or 90 days late (variable negatives)
* settled for less than amount owed (significant negative)
* charged off, sent to collection (serious negative)
Short sales, foreclosures, and deeds-in-lieu are serious negatives and significantly impact a credit score. Report negatives are calledderogatories and usually remain (affecting the score in diminishing amounts each year) for 7 years.
Lenders look at credit history as a predictive tool
for assessing a person’s future payment patterns.
Mortgage derogatories are viewed as more
negative than credit card derogatories.
Amounts Owed (30%) –
This section refers not only to the total amount of debt a person has, but also how much of his or her maximum limit is being used.
The more credit used out of the max amount available, the more it will reduce the score. Lenders like to see credit usage under 50% of the maximum limit. The lower, the better.
Remember – this is a sliding scale…
A person’s credit report and score change monthly
to reflect current usage and payments!
Length of Credit History (15%) –
This one is fairly self-explanatory. The longer a person has satisfactorily and responsibly used and managed a credit account, the better it looks to scoring models.
New Credit (10%) –
When a person applies for new credit, he or she is either anticipating buying something large enough to require financing or at least wants to be able to spend more if desired.
It also means that this person may be ready to take on more debt than previously carried.
Lenders like to know that borrowers have the ability to pay
both their existing commitments and any new bills.
Credit applied for during the last 6 months will show up on the credit report as new and will have an effect on the score. New accounts are referenced to the credit inquiries which we discussed last week.
New lines of credit usually require an explanation from the borrower when applying for a mortgage.
Once this new debt has been handled with on-time payments for awhile, it becomes just another trade line for which the person is responsible.
Types of Credit (10%) –
As we mentioned above, scoring models regard mortgages and car loans more seriously than credit card debt. Well-managed installment debt has more of a positive bearing on a score than similarly well-managed revolving debt.
This has to do with mortgages and car loans having a specific payment term/period by which all payments must be made, while
credit card style debt is open-ended. Installment debt also has a fixed amount which must be paid each month, and revolving has a minimum amount.
Student loans are considered in kind of a hybrid fashion because they are often deferred for a time before repayment starts, so we’ll discuss them another time.
we’re on the subject of credit cards, it’s interesting that scoring models regard bank-issued card payment history as more influential than store-issued cards. Visa® and MasterCard® accounts affect your credit report more than Dillards® or Home Depot® cards.
Whether or not your buyers have credit concerns, have them
get in touch with me when you first start showing them homes.
Having a pre-approved buyer makes your transaction so much easier and helps it progress toward closing much more smoothly.
Let me reinforce the trust
your client has placed in you! sm
This is a courtesy of Chris Carter,
Paramount Residential Mortgage Group, Inc.
4375 Radio Rd #102, Naples, FL 34104