What Are Mortgage Lenders Looking For in Your Credit Report?
1. Number of open credit accounts - Lenders always look at the number of open lines of credit that an applicant has, and analyze this information to determine the potential risk they face. Their computer software is able to calculate the remaining available balances on those open lines, as well as the likely minimum payment amounts. The software will always consider the worst case scenario, and therefore will project a hypothetical situation where the applicant has maxed out all available lines and is paying the minimum required on all those accounts. This will then be factored into the debt-to-income ratio and some income analysis will be done to see if the applicant would still be capable of paying the mortgage every month.
2. Number of closed credit accounts - Lenders will analyze your credit history report to see if you’ve recently closed any major revolving lines of credit prior to applying for a mortgage. Since your report will specify exactly when the account was closed, as well as if it was closed at the creditor’s request or the account owner’s request. If a large number of credit accounts were closed at the same time, lenders may ask for additional information about the reasons for the closures.
3. Length of employment - Since the ability to pay the loan every month is directly affected by an applicant’s employment; this is obviously a major concern for lenders. The longer a borrower has had the same job, the more experience he will have with his weekly or monthly paychecks. Conversely, an applicant who has recently changed jobs may not yet be used to the new pay scale, or to the new paycheck’s deductions, etc. A longer employment with the same company also implies to the lender that the applicant is stable and dependable. On the flip side, a loan applicant with a scattered employment history and only a short period of time with the current employer could indicate potential problems in the future. If a borrower changes jobs frequently, the likelihood that new employment compensation will not be stable is a concern.
4. Payment consistency - This is one of the most important aspects of a loan applicant’s credit history. Aside from everything else, the borrower’s ability to make timely payments every month will usually be the deciding factor in whether or not a loan application is approved. Lenders are usually willing to take everything else into consideration for approval except for this. If a lender sees that there are credit lines with 30, 60, or even 90 day late periods on a regular basis, then this implies that the borrower does not make enough money to pay those balances, or the borrower simply is not responsible enough to make monthly payments. Neither one of those determinations is good for an applicant. The payment history is also most closely examined for the proceeding year, because lenders are more concerned with what you’ve done recently rather than several years ago.
5. Length of credit profile - A loan applicant’s credit report will indicate the age of the oldest open credit account. This particular account is always analyzed by lenders more closely than the others because it gives clear indication as to the consistency of the borrower’s ability to pay on time. Lenders understand that people’s situations change and sometimes things get difficult, but the borrower’s ability to recover from such circumstances will be clearly indicated in the history of the oldest account. If sporadic and severely late payments are shown throughout the applicant’s oldest account’s history, then the lenders are likely to believe that such actions are merely ordinary behavior.
6. Time at current address - An applicant’s length of time at his current address is always taken into consideration by lenders because it implies potential dangers that are similar to the applicant’s length of employment. If a borrower has lived in the same place for several years, the lenders see stability and consistency, and will feel comfortable that the borrower has been able to balance income and living expenses. If a borrower shows multiple recent addresses and address changes, then the lenders are likely to view this as instability and a chance that income may not be enough to cover living expenses.
7. Debt-to-income ratio - Another very important aspect of the loan applicant’s credit profile is his debt-to-income ratio. This is a calculation that lenders will complete to determine the amount of debt compared to the amount of income. If the ratio indicates a level of debt that is above what the lender’s experience has deemed acceptable, then the loan application will be declined.
8. Bankruptcy - A credit report that indicates an applicant filed for bankruptcy will be scrutinized much more than one without such a notation. Bankruptcy of any kind is a clear indication that the borrower was unable to adequately manage his monthly expenses, or merely took on more credit than he was able to handle. Neither one of these scenarios will benefit the loan applicant.
9. Multiple collections accounts - When an applicant’s profile lists credit accounts that have been turned over to collection agencies, the lenders are always extremely nervous about approving such loans. Accounts with collection agencies indicate that the borrower was either unable to pay the monthly minimums, or merely ignored such demands. The fact that a collection agency was involved also indicates that the borrower was either unable or unwilling to work things out with the original creditor, and this is a major cause for concern. The simple fact that an account was turned over to a collection agency means that the applicant’s credit profile will list an account with consistent late payments and past due unpaid balances. Many times, the report will also note that the original credit closed the account and wrote off the unpaid principal as bad debt. This notation is severely damaging to a loan application.
10. Judgments - A judgment listed on a credit profile indicates that a borrower failed to repay an original creditor, then also failed to make arrangements with a collection agency, and was then taken to court by one of the two organizations, where a judge ruled in favor of the creditors and arranged some form of repayment or compensation. If an account went so far without payment or resolution, this clearly indicates to a mortgage lender that the applicant was either unable or unwilling to satisfy his obligation. This dramatically reduces the applicant’s chances of approval because, most of the time, a mortgage is the largest debt a person will get, and if he was unable to responsibly handle his existing, smaller, debt then how will he handle a much larger obligation.
11. Liens - Liens on an applicant’s credit report are very often the result of a judgment, so they are viewed in much the same way and with the same level of hesitation by lenders. A lien will usually be attached to an applicant’s assets or possessions of value.
12. Multiple credit cards/lines maxed out - When an applicant’s credit report lists multiple lines of credit that have reached their available limit, this makes lenders nervous because it indicates that the borrower was required to use credit to purchase necessities for which he did not really have the income. Again, this implies that the borrower is living beyond his means and may be unable to pay the mortgage.
13. Repossessions - A credit report that notes the repossession of an automobile could potentially result in a declination because this is simply another indicator that the borrower was unable or unwilling to repay a previous loan, and the situation deteriorated to the point that the tangible collateral securing the loan needed to be taken by the creditor. A repossession of an automobile is nearly identical to a home foreclosure, but on a smaller scale. Seeing this on a mortgage applicant’s credit report will make lenders extremely hesitant to approve a loan.
14. Evictions - If an applicant was evicted from his apartment, the lender will be very wary of approving a loan for this individual because eviction indicates an inability or unwillingness to pay. This scenario is very important to lenders because rental fees for an apartment fall into the category of housing and living expenses, and therefore have a definite connection to the mortgage loan. If a borrower was forced to leave his previous residence due to non-payment, what evidence exists that this will not happen again?
15. Foreclosures - Foreclosures listed in a mortgage applicant’s credit history are one of the most significantly negative entries. They indicate that the borrower has been in the exact same situation before, and it did not turn out well for the mortgage lender. The applicant’s previous loan experience will be very important to the new potential lender, so a foreclosure within the past several years will make it extremely difficult for any mortgage applicant to obtain approval.
16. Credit counseling services - When lenders see that an applicant has used the services of a credit counseling company, they are always hesitant to approve a loan for that individual. Use of a credit counseling service is a clear indication that the borrower was unable to repay his previous or existing obligations per their original agreements and terms, and was also unable to work things out independently with the original creditors. Lenders who see such notes in a credit file will be very nervous and more likely to decline an application, or in the least approve it with much higher interest rates to offset their additional risk with such a borrower.
17. Multiple recent new accounts - If a lender sees on an applicant’s credit profile that he has opened several new credit accounts in the recent past, this is a major cause for concern because the only way lenders can interpret this information is to assume that there was a need for the applicant to pay money he did not actually have. The mortgage companies’ experience has taught them that the average consumer in good standings has no need to immediately open several new credit accounts at the same time, unless there is an undisclosed problem that required a significant amount of money.
18. Number of credit inquiries - A common misconception in the lending industry has been that multiple credit inquiries within a short period of time will result in negative credit scoring and concern from mortgage lenders. This is not entirely true. Indeed, lenders will look more closely to the applicant’s file when there are multiple notes indicating requests for credit or applications. However, these inquiries’ effect on a consumer’s credit score and potential mortgage approval will depend on the type of credit being investigated. If the inquiries all come from auto loan lenders or other mortgage companies, then there will be not negative effect on the consumer’s application. The majority of lenders will consider multiple inquiries within a short period of time to be one large inquiry, thereby having little negative effect. Additionally, it is important to mention that the number of “permissible” inquiries into one’s credit in a short period of time also depends on the length of that consumer’s credit history. Obviously, those with a longer credit history will be allowed to have more inquiries than those with little or no history.
19. Student/education loans - Lenders do not worry too much about the amount of student loan and college education debts that an applicant has, provided that the current payments have been regular and on time. Many of the more technologically advanced lenders have software that will take education debt into consideration in a different fashion than other types of debt. This difference usually comes in the form of a smaller influence and less consideration on the overall debt-to-income calculation because lenders typically believe that more education will ultimately result in higher salaries.
20. Automobile loans - Provided that a borrower pays his car loan on time every month, lenders will not usually hold such loans against him when considering his overall outstanding debt. This is also true because such loans are secured by the car itself, and there is small likelihood of non-payment of that loan dramatically effecting the mortgage.
