What Lenders Look For in a Credit Report
How to analyze and help your credit score.
Although each of the three credit bureaus, Experian, Trans Union and Equifax have a different algorithm to measure credit scores, they all basically use the same information. It is best to look at your credit report several months before you commence the financing process. A good mortgage professional like those at Pan Am Mortgage can give you priceless advise in anaylzing and boosting your credit scores. Rates are determined by credit scores, thus the higher the score, the better the rate.
While you can get your own annual free credit report from each bureau, a single bureau report does not break down the information in a useful manner to facilitate easy analysis. So if you are shopping around for a home loan, have a report with all bureaus scores on it, and make sure it is not pulled repeatedly by different mortgage people. Ask your broker to give you a copy of your credit report. A good loan officer will not refuse, as he or she knows that even after you shop around, you will come to back to them.
What to look for in your report
Make sure your names, i.e., all variations, are correctly listed along with your social and home addresses. Your employment history is also listed. Make sure that information is consistent with your actual history. If there is inconsistency, it can raise red flags during mortgage process. Correct any information by contacting the bureaus and they have an obligation to investigate and correct any misinformation.
Percentage of Credit Use to Available Credit. Our loan officers will carefully review your credit history and tell you what to do to increase your scores. It is often advisable to use less than 50% of your available credit. Once the home financing process has commenced, it is not a good idea to close or open revolving or other installment accounts without taking into account the impact on your your overall credit use and its affect on your credit scores. If you have a lot of outstanding balances and your close your accounts, the amount outstanding compared to your available credit line goes up, thus driving down your scores. As you percentage use goes up, your scores get adversely impacted. If you are looking to get a mortgage several months down the road, sometimes, it is a good idea to have your current creditors increase your credit availability or apply for new cards, though you should avoid doing that once you have applied for a mortgage.
What does “charged-off” – “bad debt” or “placed for collections” mean? This means the account went longer than 120 to 180 days without a payment from you. At this point, the credit card company decided the debt was not going to be collected from you, and decided to write it off. The company took the IRS tax deduction and sold the debt to a debt collector.
What does “Account Closed by Credit Grantor” mean? The credit card company was worried you would default on the debt and shut down your ability to access any more of your credit line. This sometimes happens if you are defaulting on other cards, also referred to as universal default.
Deal with any Late Payments. All three reports seem to be pretty consistent on this. They use a little square with either 30, 60, 90, or 120 in it and you don’t want anything but a “zero” underneath that symbol. You want to see “OK” in green shown, or under “status” the notation “never late.” Correct Incorrect Information on your Report. Contest lates if you have a good reason why a payment was made late. While most revolving late payments can be explained, mortgage lates are deal killers. Recent late payments on mortgages, foreclosures and short pays on your credit report are almost fatal to mortgage applications. Most banks will not approve a mortgage in the event of a 12 month history of any of these three. You may have to wait to qualify.
Public Records. The three bureaus also collect public records from various state and county courts and register’s officers. Judgments are generally filed and stay on credit for ten years though they can be renewed for an additional ten years. If you have a judgment against you that has not yet made it to your credit report, deal with it before it is reported. Make sure all judgment are satisfied and any collections are paid. The more recent the judgment or collection, the more adverse an impact it will have on your credit.
Recent Inquiries. Have explanation letters for most recent inquiries on your credit reports. Several inquiries bunched in the same period for the same purpose will have minimum impact, though applications at the same time for multi-purpose loans, such as a credit card loan, a home loan or a car loan will have adverse impact on your score. Your report will list a detail of all inquiries. Make sure they have been authorized by you. Hard inquiries are requests made or authorized by you and will impact your score. Soft inquiries are solicitation inquiries by various vendors looking to send you pre-approvals, etc. and these do not impact your score and do not always show up on the report.
Spouse History. Your credit report will contain only your credit and loan accounts. The exception is joint accounts shared between you and your spouse. Here, the account history will be reported on both your and your spouse’s credit report. Similarly, if one spouse is an authorized user on the other spouse’s account or one spouse co-signs the other’s account, the account history will be reported on both credit reports.
What is “Date of Last Activity” (DOLA)? This will be specified on the report as “last updated” or “last activity” and basically is the last date any account activity occurred, typically the last time you made a payment. Most courts will use this date to toll the statute of limitations. In New York a creditor has 6 years to commence a collection action in court. Your last activity is the point from which the clock starts ticking.
Identity Theft. Most importantly, if you have been a victim of identity theft, immediately inform the credit bureaus so they can put a Fraud Alert on your report. If you are, or suspect you may be, a victim of fraud or identity theft, place a Fraud Alert on your credit report to alert potential creditors or lenders. When alerted, they can take steps to protect you. Once you place a Fraud Alert, you can choose to remove it at any time online
Balram Kakkar, Esq., CEO, NMLS # 3500