How Your Credit is Evaluated
When Approving Your Loan
by Michael Licamele
Credit standards have been standardized over the past several years, asthe large institutions such as Fannie Mae and Freddie Mac have establishedguidelines for credit. Since most mortgages are sold to these institutions,their standards are in effect at most institutions. If your credit historydoes not meet these standards, you may be able to obtain what is calleda non-conforming B-C-D credit loan at higher rates.
The following guidelines are in effect at Fannie Mae, which is the ultimatepurchaser of most conventional mortgages. These guidelines should give afeel for how underwriters evaluate a the credit portion of an application.If you are not sure whether you meet these guidelines, you should obtaina copy of your credit report from the three major credit reporting companies.
The borrower's credit history should demonstrate his or he past willingnessand ability to meet credit obligations that will who the borrower's commitmentto making payments on the new mortgage being considered. They are more concernedabout a borrower's overall pattern of making payments than they are abouta few individual occurrences. A borrower who has made payments on outstandingor previous credit obligations according to the contractual terms will havea credit history that consists of no late payments and no adverse or derogatoryinformation (such as bankruptcies, judgments or collections). In some instances,a borrowers credit history may reflect an occasional late payment that isnot necessarily attributable to the borrower's disregard for his or hercredit obligations. Outside factors-such as slow mail, disputes, differentcreditor reporting or rating methods, etc.-may have resulted in the reportingof the late payment(s). To make sure that a borrower who has an otherwisegood payment history is not penalized for an occasional late payment, wedo not require perfect or spotless credit records. The lender must evaluatethe age of any account that reflects late payments, the frequency and severityof the late payments, the size of the account balance, how long ago thelate payments(s) occurred, and the status of the borrower's other creditaccounts.
The lender will look at the borrower's credit history over the past sevenyears to determine whether there are any major indications of derogatorycredit (such as undisclosed debt, judgments, bankruptcies, etc.). However,the lender generally reviews only the past 24 months for minor instancesof derogatory credit to ascertain that the borrower has a sufficient numberof accounts without adverse ratings to support a determination that hisor her overall credit history is an acceptable one. Unless the borrower'scredit history over the last 24 months raises some serious concerns (orthere are major indications
of derogatory credit at any time during thelast seven years), the lender will consider a borrower's credit historyas acceptable if, over the last 12 months the borrower has had no more than2 revolving and 1 installment loans past due.
If the credit history reflects a consistent pattern of slow payments, undiscloseddebts, suits, judgments for non-payment of obligations, bankruptcies, etc,the lender must investigate each major indication of derogatory credit.In most cases, a letter from the borrower may provide a sufficient explanationfor the derogatory credit; in others, additional supporting documentationmay be required to back up the borrower's explanation. If a major indicationof derogatory credit cannot be explained and there are no extenuating circumstancesto be considered, there must be strong offsetting factors in order for theborrower to receive favorable consideration. If a borrower has no credit,underwriters can develop a credit history for borrowers who normally donot use credit or do not have the type of credit history that will not appearon a credit report. Credit histories can be developed from rent paymentsand utility bills such as electric, gas, telephone and cable.
Finally, a borrower will generally be denied for a mortgage loan if theborrower has been a defendant in mortgage foreclosure proceedings in thelast three years. If a borrower has experienced a foreclosure or bankruptcyin the past three years, it is crucial that the borrower reestablish a goodcredit history during that time period. A borrower can use secured creditcards, a loan with a co-signer, a credit union loan, or local store cards.
If your credit history is not acceptable under the description above, youhave two choices. The first is to work on creating a positive credit historyover the next one to two years by cleaning up old debts and making all currentdebt payments on time. The second option is to make a larger down payment(usually 10% to 30% down) and obtain a loan with a higher interest rate.
These programs carry interest rates that range from 9% all the way to 15%or 16% depending on how poor a borrower's credit history is. These loansare available from mortgage bankers and mortgage brokers. CAUTION: Beforeconsidering this type of loan, be sure to review all terms and conditionsof the loan.
If a borrower chooses a non-conforming loan, he or she can keep the loanfor one to two years and then refinance into a normal lower-rate loan ifall mortgage payments are made on time and all other debts are kept current.Many of these loans now do not have any pre-payment penalties (they alldid in the past).