A Loan Officer Doesn’t Stop at Your Score When Looking at Your Credit Report
When a lender runs your credit, they don’t stop after seeing your score. A credit report is full of information that helps them decide if you are able to get approved for a loan. In all cases, you will want to review the credit report with your lender for inaccuracies. Many reports have them and they could affect your ability to qualify for a mortgage. Here are the things that Lenders look for when they receive your credit report.
The first and most obvious will be your credit score. It is true that lower scores will make it harder to get approved. However, don’t think because you have a low score you will never be able to buy a home. There are typically three scores. They come from the three credit bureaus. They are Experian, Transunion, and Equifax. If a report contains scores from the three bureaus the lender will use the middle score as your score for approval. If there are two borrowers on the loan the lender will use the lower mid-score among the borrowers. When a borrower doesn’t have any scores reporting by the credit bureaus you may be able to use non-traditional credit as a way to get approved for a home loan. Otherwise, you would have to work on establishing some credit to get pre-approved.
The lender will look for any non-medical collections that appear on your report. While a medical collection may have a small affect your score, they won’t affect your ability to get approved for a loan. Each loan program has a different way of looking at collections. For example, FHA doesn’t like seeing a total collection amount of over $2,000. This will be different from lender to lender. If this is the case your lender will discuss the options with you.
After seeing your scores, the lender will look for major credit events on your report. Items such as bankruptcies, foreclosures, tax liens, and judgments will all create hurdles to approval. Each program has its own predetermined waiting period for bankruptcies, foreclosures, and short sales. In most cases, tax liens and judgments will need to be paid off in order to get final approval for a loan.
The lender and underwriter will look for late payments on the report. Late payments on mortgages don’t look great in the eye of an underwriter. Other types of late payments will also not look great. In almost all cases you will need to explain to the lender why the late payments occurred and what you have done to remedy the situation. In most cases, you will be required to be current on all accounts prior to loan approval.
Student loans have been a problem for a lot of people. It is typically one of the first things I look for on a report. The payment shown on the report may not always be the amount the lender will be required to use for approval. For example, on an FHA loan, the lender is required to use 1% of the remaining balance for qualification purposes. This is regardless of the amount you are currently paying each month. Each program is different. Be sure to talk about all of the options with your loan officer.
Account in Dispute
Any non-medical accounts in dispute on your credit report will need to be removed prior to loan approval. If you are working with a credit repair specialist and have accounts in dispute contact them prior to starting the pre-approval process. I can also help you with this if need be.
Monthly Payment Amounts
One of the major components of your loan approval will be your debt-to-income ratio (DTI). This is the percentage of your monthly debts divided by your gross monthly income. Your DTI is determined only by the monthly payments listed on your report. A lender will divide those payments by your gross monthly income to determine your DTI. Each loan program has a different standard for debt to income ratio. A conventional loan won’t allow the debt-to-income ratio to go above 45%.
Without a full review of your credit report, a lender won’t be able to determine your ability to qualify for a loan. As you can see there are a lot of factors that go into credit report review. While it is good to keep tabs on your credit through your credit card companies and the online credit companies like Experian and Credit Karma, in many cases the score a lender pulls will be different. If you have questions or concerns about some of the items appearing on your report, be sure to discuss them with a lender prior to making any changes. A loan officer should be able to help you take the right steps to help you improve your credit.