Your lender uses many tactics to assess credit: your credit report, credit score, credit grade, credit inquiries, credit profile, and other factors such as savings account balances, or monthly debt compared to your combined monthly income.
Credit Report: This is a detailed report of your credit history that is designed to provide potential lenders with information, helping you to use checks, obtain debit and credit cards, and to secure loans. There are many credit reporting agencies across the country, and personal inquiries are usually free. And by the Fair Credit Reporting Act, if you are turned down for a loan, you are entitled to a free copy. Added protection is afforded the borrower under the Equal Credit Opportunity Act, which says that a lender cannot discriminate by matter of sex, race, nationality, or gender. In cases of a rejection, they must provide a detailed account of the reason or reasons.
Credit Inquiries: Keep in mind that every time you or potential lenders make an inquiry into your credit history, it is recorded on your credit report and can possibly make it harder to obtain a loan or credit in the future.
Credit Score: Creditors score your credit based upon a complex scoring model that varies from lender to lender. By far the most popular is the FICO system, developed by Fair, Isaac and Co. This credit evaluating system was created to give uniformity to the evaluations of creditors, and has been accepted by the Federal Trade Commission. It considers numerous factors when evaluating a potential borrower ’ s credit: the length of established credit, the amount and frequency of late payments, history of employment, negative credit (bankruptcy, collections, etc.), length of residence, and the amount of credit used versus the amount of credit available. There are scores assigned to the different bits of information, which when inputted into mathematical tables, allow the creditor to analyze the inherent credit risk involved. The average FICO score is usually between 620 and 660.
Credit Profile: A detailed compilation of all the creditors that have extended credit to you, it records when and how long your accounts were opened, tracks your late payments, and inquiries to obtain new credit. It is a basic record of how you have handled your financial responsibilities and whether you have paid back other loans in a timely fashion.
Credit Grade: Lenders grade potential borrowers based on a number of specific factors. Credit is obviously a big factor and it is divided into three sections: consumer credit, mortgage credit, and public record. Consumer credit has to do with bills and credit cards, while mortgage credit weighs your past and current mortgage payments. Serious credit problems such as foreclosures or bankruptcy fall under the public record section; with every serious credit problem, the credit grade drops accordingly. Next, they consider debt ratio, which is computed by dividing the total monthly debts by the monthly income. The credit grade will be higher if the debt ratio is low.
Next, they look at the loan-to-value ratio, or the LTV. This is the ratio of the borrowed amount compared to the market value of the home. Generally speaking, the higher the credit grade, the less stringent lenders are about the LTV ratio, which is how much you can borrow compared with how much your house is worth. Finally, the credit score (such as the FICO score) is factored in, and then the customer is given a grade. The highest grades (A or A+) are given the best interest rates.
In order to find out exactly what documentation you need for the loan application, please visit the Loan Process page.