What does your personal credit report say about you? When applying for a home loan, the last thing you need are surprises. That’s why anyone who is considering buying a home should obtain, and if necessary, correct, their personal credit report.

 

Understandably, a mortgage lender wants to know your track record of paying your debts. To find out, the loan officer will order a mortgage credit report from a bureau that collects information from retailers, banks, finance companies, mortgage lenders and other public sources on all consumers who use any type of credit.

 

You have the right to inspect a summary of your credit report, challenge any inaccuracies and request that the credit agencies make corrections.

 

You can purchase a special consumer version of your report by contacting one of the major credit bureaus covering your area.

 

Upon receiving your credit report, carefully review the explanation of codes used to rate your payment history for each account and scrutinize each entry. Credit bureaus, which handle millions of consumer records, are notorious for including erroneous information. The good news is they are required by law to promptly substantiate or correct any discrepancies.

 

If you discover any errors in your report, immediately follow the bureau’s procedures to correct them. If your credit report still has a negative tone or contains a series of late payments that may have occurred due to extenuating circumstances, you have the right to submit an explanatory statement that can be made part of your permanent record.

 

It is important that prospective lenders know that you care about your credit history.

 

Credit requirements can vary from lender to lender and loan program to loan program. I will not attempt to describe each and every scenario but explain general credit requirements found in most underwriting guidelines.

 

Lenders view credit as the willingness and ability to repay a debt. It does not mean having every credit card imaginable and keeping up with the monthly payments. It does not mean one cannot obtain credit without first having it. It means that if one has an obligation (car payment, credit card, rent, utilities), one pays it when due and has the means to do so. 

 

Credit is one of several factors lenders use when determining how much of a loan to issue. Are you a good risk or a bad risk? What’s the difference between good and bad?

 

Good credit means paying on time over a period of time. If you just got a credit card at a department store and charged a pair of socks and paid them off the minute you got your first bill then that’s good … but it’s not all the lender wants to see. A lender needs a track record of your ability and willingness.

 

One month, or six months for that matter, is not enough to convince a lender that you have both qualities of ability and willingness. In fact, for most major lenders one to two years is a good evaluation period. So relax and take it easy. Do not force the issue. Remember, the lender is thinking about accepting your promise to pay them back once a month, every month, for the next thirty years!

 

Willingness means you have accepted the responsibility of paying back your obligation and you do it on time, every time. Ability means you have the money to do so. That’s why people who have LOTS of credit cards sometimes can’t get a mortgage because too much of their money already goes to credit cards or automobiles (even though they’ve always paid on time). Remember that ability to pay is just as important as willingness.

 

Bad credit means at one time or another the individual has experienced repeated late payments, charge-offs, collection accounts, liens, foreclosure or bankruptcy, but that doesn’t necessarily mean you can’t get a mortgage. There are lenders who will loan on properties based more on the value of the home and the amount of down payment and interest rate. Lenders who issue these mortgages are sometimes called ‘equity’ lenders or ‘hard money’ lenders.

 

Bankruptcy. A Chapter 7 means that your debts were wiped clean and fully discharged. You don’t owe anyone anymore. This stays on your credit report up to 10 years. BUT that doesn’t mean you have to wait that long to get a mortgage. Contrary to popular belief, some lenders will loan to people who have had a bankruptcy with as short a period as ONE year ago. Yes, that’s right, one. And these aren’t hard money loans either.

 

Don’t file a bankruptcy because you exhausted your savings and maxed out your credit cards to go to the Bahamas. A lender will want to know why you filed for bankruptcy. Illness in the family? Loss of job? Divorce? Be prepared to explain your filing and document your case. Show medical bills. Tax Returns. Death certificates. If you can provide a good explanation as to why you were forced to file, you can get a mortgage. Before you file any type of bankruptcy, get legal advice!

 

Another type of bankruptcy filing is Chapter 13, sometimes called the “wage earners” plan. In this filing, all your bills are lumped together (by the court) and you make arrangements to pay everyone back on a monthly basis per court order usually through payroll deductions or other mandatory repayment programs. This plan shows a good faith attempt to repay your creditors instead of discharging them completely. However, a lender may still want to see the Chapter 13 fully discharged (all parties paid in full) before issuing a mortgage. In this instance your repayment period can last two, three or more years and you may have to wait one more year before getting a good mortgage.

 

Most secondary markets require credit to be established after a bankruptcy. Get a secured credit card. Go to your bank, credit union, or wherever and ask for a secured card. You will be asked to place a certain amount of money in a pledged savings account to act as collateral for credit issuance. For example, if you want a $500 limit credit card the lender may ask for $600 security deposit, sometimes less depending on your and your lender’s status. You can charge on the card just like any other and make payments like any other

 

If you have a bankruptcy, run, don’t walk, to your local lender who offers secured cards. This is an easy way to reestablish credit. And again be patient. The most recent year or two before applying for a mortgage is what the lender will review with more scrutiny than the previous five or ten.

 

What about LATE PAYMENTS? A few late payments over the past couple of years shouldn’t stop you but be prepared to explain them. Lost in the mail, out of town, abducted by aliens, whatever, just make sure it’s what really happened. Again late payments won’t stop you from getting a mortgage just be prepared to have a darned good excuse or compensate in other risk areas (more down, etc.). Late payments on a previous mortgage may also be more harmful than late payments on a car loan.

 

Lenders will swallow lates a little easier if they happened around the same period of time. Like the winter you were laid off or when you were sick and couldn’t work. You could then show you had the willingness but not the ability because you were unable to bring home enough money to pay off your monthly obligations. But then you got well, went back to work and made everything smooth again.

 

What about a collection account? If it’s yours, pay it off. If you dispute it, get it settled now.