How Lenders Analyze Credit Report And Credit Scores

How Lenders Analyze Credit Report And Credit Scores

This BLOG On How Lenders Analyze Credit Report And Credit Scores Was UPDATED On February 3rd, 2018

There are minimum credit scores required to qualify for government and/or conventional loans.

Here are the credit score requirements:

  • FHA requires a minimum credit score of 580 for 3.5% down payment home purchases
  • VA does not have minimum credit score requirements, however, it is recommended that veteran borrowers have 580 to get an approve/eligible per Automated Underwriting System approval
  • USDA requires 580
  • Fannie Mae and Freddie Mac require 620 scores for Conventional Loans

Just meeting credit scores does not automatically render an automated approval per Automated Underwriting System. The automated system will also fully analyze the borrowers overall credit payment history from credit report.

Special emphasis will be placed on the following:

  • Past 12 months payment history
  • Any late payments after bankruptcy and/or foreclosure
  • Late payments after period of bad credit

Mortgage Borrower Payment History

Lenders view mortgage borrower’s past payment history as an indicator of future payment on their new mortgage loan. It is perfectly understandable for borrowers to have periods of bad credit due to unemployment and/or other extenuating circumstances. However, lenders want to see re-established credit and no late payments after periods of bad credit.

Consumer credit history is what shows on on credit reports.

Here are items that report to credit bureaus:

  • Credit card and revolving accounts
  • Auto loans
  • Student loans
  • Medical bills
  • Mortgage loans
  • Collection accounts
  • Charge offs
  • Judgments
  • Tax liens
  • Late payment history
  • Debt settlement histories

How Lenders Analyze Borrowers Payment Behavior

The above credit tradelines and payment history are all gathered into a data bank by all credit reporting agencies into a single report known as credit report.

  • All the information compiled in credit report is analyzed
  • The credit bureaus will issue numerical value known as a credit score
  • Credit report and credit scores are what creditors and lenders will primarily take into consideration in whether they will grant credit
  • If they do decide to approve consumer for credit, then the rate and terms offered depends on credit scores
  • How good credit report and credit scores are factors in determining interest rates
  • Credit report and credit scores will determine the risk factor the creditors and lenders take into account

 Credit Report And Credit Scores Determines Risk Of Borrower

Whenever consumers apply for credit, creditors will check credit report and credit scores.

  • The creditor then will review credit report on applicants payment patterns and payment history
  • Credit scores are used to determine credit risk of applicant
  • The lower the score, the higher risk level is and the more of a chance of defaulting on obligations
  • This is how creditors judge  risk tolerance
  • The lower credit scores, the higher interest rate 
  • Utility companies also check credit report and credit scores
  • The lower the scores are, the higher deposit they will require
  • For those with stellar credit scores, a deposit might not be required

Credit Bureaus

Credit report contains personal and financial information.

Here are other information contained in a consumer credit report:

  • Residential History
  • Employment History
  • Date of birth
  • Social security number
  • All Creditors
  • Payment history with every creditor in the past 7 or more years
  • Public records such as the following:
    • Bankruptcy
    • Foreclosure
    • Judgment
    • Deed in lieu
    • Short sale
    • Collections
    • Charge offs
    • Lens
    • Tax liens
    • Child support delinquencies’
    • Other public and private information
  • The three major credit reporting agencies is responsible to maintain credit reports

The three credit reporting agencies collects consumer’s personal and financial information from creditors and creates a credit profile for virtually everyone.

  • This information is gathered and sold to creditors who requests credit from consumers
  • Creditors uses this information to make a credit decision on credit request
  • Creditors pay a fee for each credit request from the three credit bureaus: 
    • Transunion
    • Experian
    • Equifax

Those who are granted credit from creditors and lenders will report credit information and credit payment history to the three credit reporting agencies. This is how credit history is then established.

  • On time payments
  • Late payments
  • Credit limits
  • Credit balances
  • Credit inquiries
  • Collections
  • Charge offs

The above are all reported by the creditor and it becomes part of credit history for future creditors and lenders to view.

Credit Scores

Credit scores are scores that each of the credit reporting agencies derive from credit report.

  • Credit report and credit scores are the two factors a creditor and lender will use to determine risk tolerance
  • After evaluating risk, they then grant credit and determine interest rates charged
  • Credit scores will fall somewhere in between 300 to 850
  • Each of the three credit bureaus have their own formula in calculating credit scores
  • Most will have three different credit scores
  • The higher the credit scores are, the less of a risk which means  favorable terms and rates

Qualifying For Mortgage With Lender With No Lender Overlays

The Gustan Cho Team at USA Mortgage is a national mortgage banking firm with no mortgage overlays on government and conventional loans.

  • As mentioned earlier, there are minimum credit score requirements to qualify for government and/or conventional loans
  • However, banks and mortgage lenders can set higher credit score requirements than the minimum credit score required by FHA, VA, USDA, Fannie Mae, and/or Freddie Mac
  • The higher mortgage guidelines are call mortgage lender overlays 
  • For example, USA Mortgage only requires what FHA requires of 580 credit score to qualify for FHA Loans
  • However, ABC Bank may require a credit score of 640 even though FHA only requires a 580 score
  • ABC Bank has FHA Lender Overlays on credit scores
  • Same with VA Loans. I recently closed on a veteran borrower with a 587 credit score and 58% debt to income ratio
  • However, most VA Lenders will require a 620 credit score even though the U.S. Department Of Veteran Affairs does not require a minimum credit score requirement on Veteran Borrowers
  • The higher credit score requirement on VA Loans by lenders is called Mortgage Overlays on credit scores

Home Buyers and/or Homeowners who need to qualify for mortgage with a direct lender with no overlays, contact us at The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at gcho@usa-mortgage.com. We are available 7 days a week, evenings, weekends, and holidays.

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