How Credit Affects the Loan Process
Most lenders look first at your credit report to determine your ability to repay the mortgage. This history of your credit obligations usually serves as the best indicator of a borrower’s willingness to repay debt. A borrower who has made timely payments on past and current credit obligations demonstrates a reduced risk. The general pattern of repayment gives an overall picture. While there can be an occasional slow or late payment that can be explained to the lender, repeated late payments, or several delinquent accounts, will require strong offsetting factors to get the loan approved.
New borrowers often face the problem of a lack of credit history. The usual minimum is two trade lines. These could be credit card, car loan, or student loan. If these are not available, some lenders will look at alternative lines, such as utility payments, or auto insurance payment history. If your credit report shows any derogatory remarks, that item will require a satisfactory explanation. Installment loans with less than 10 months remaining do not generally have to be included in your credit analysis. However, if one of them has a high payment such as $100 or more per month, it will most likely be included in the lenders calculations.
Some borrowers are surprised to find out that a loan, they co-signed for is included in their debt ratios. Unless the borrower can prove that the other party has been making the payments for at least 12 months, they will have to qualify for the loan based on that debt also being included as one of their legitimate debts. If a married spouse purchases a property alone, the credit obligations of the spouse may be used to determine the borrower’s ability to repay the loan.
Bankruptcy requires a minimum of 2 years since the discharge generally speaking, and an explanation will be required for a Chapter 7. A chapter 13 bankruptcy may be considered after 1 year of satisfactory payment history. Usually the court will have to show payment history and approval.
Judgments, along with collection accounts need to be paid in full. The exception would be a collection account with $100 or less owed.
Federal debts such as SBA loans, student loans, HUD or VA mortgages, may not be delinquent. The same applies for tax liens. They must be brought current or paid in full.
Foreclosure within the last 3 years will likewise adversely affect your loan approval. However, there are lenders who will do these loans at much higher interest rates due to the perceived risk involved.
These are just some of the ways your credit can affect your ability to get the home you want. Your mortgage professional can guide you through the process, and help you qualify for the loan you need for the home you want.
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