When applying for a mortgage or home loan, the first things a mortgage lender is going to ask is “How is your credit?” You need to know and understand why this is so important and how you will answer the question! If the answer is “I have bad credit”, there are still options open to you, but you will want to work towards a good credit rating, so in the future, you can provide a different answer. The information in your credit history helps mortgage lenders decide how much credit and what interest rate you are eligible for. The better your credit history, the more likely you are to qualify for the best credit deals.
OK, so you have bad credit, but how bad is it? The very first step is to obtain a tri-merged credit report, along with your credit scores (see below). There are 3 main credit reporting agencies used by the mortgage Industry and they too will usually pull a tri-merged credit report. Then the credit score contained within the credit report is used to determine your credit worthiness. Bad credit is often any credit score less than 620.
First let’s take a look at what is a credit report?
A consumer credit report is a document that contains a factual record of an individual's credit payment history. Mortgage lenders are permitted by law to review your credit report to objectively determine whether to grant you a mortgage approval. Each mortgage lender has their own underwriting guidelines they follow. Thus, if you have bad credit, you need to find a lender that has easier underwriting guidelines and will accept a mortgage application with bad credit listed on the credit report. Here at BadCreditMortagage we understand and can approve mortgage loan requests with bad credit. There are 190 million credit active people in the United States who have a charge account, car loan, student loan, home mortgage loan, liens, bankruptcies, foreclosures etc. It is obvious that bad credit will result from any reported late payments, and any other derogatory reporting. As those people pay their bills, most lenders report credit payment information to credit bureaus. Both the good and the bad! So most of the information in your consumer credit report comes directly from the companies you do business with.
Now, what is a credit bureau?
A credit bureau or credit reporting agency is in the business of gathering, maintaining, and selling information about consumers' credit histories. It collects information about consumers' payment habits from credit grantors like banks, savings and loans, credit unions, finance companies, mortgage companies and retailers. The credit bureau stores this information in a computer database and sells it to credit grantors in the form of credit reports. When you apply for a mortgage home loan, the mortgage company orders your credit report from at least one credit bureau, but usually all three, and analyzes the information to decide whether to grant you credit. The credit bureau charges the mortgage lender a fee for every credit report sold.
Although credit-reporting agencies provide your credit report to mortgage lenders when you apply for a mortgage, they do not make actual lending decisions. It is up to individual mortgage lenders to evaluate your credit report and any other factors they consider important and then decide whether or not to offer you credit. You will need to find a mortgage lender that works with you and understands that bad credit can happen, and that often there is a good explanation.
What is a credit risk score?
A credit risk score is a statistical summary of the information contained in a consumer's credit report. The most well known type of credit risk score is the Fair, Isaac or FICO score. Sophisticated mathematical processes calculate the score by assigning numerical values to various pieces of information in the credit report. Credit bureaus provide risk scores to mortgage lenders to objectively evaluate an applicant's credit-worthiness. The score itself is relative and will be viewed differently by mortgage lenders depending on numerous factors, including the creditor's risk level, marketing goals, and mortgage underwriting guidelines. Your risk score will change over time as your credit history develops. Scores range from 375- 900. The higher the score the better the credit rating. Usually any credit score under 620 is considered bad credit. When we refer to bad credit, we are referring to anyone who may not qualify for a conforming mortgage. Your credit may not be that bad, but your credit score can still be low, causing you to be declined by a mortgage lender who does not accept any scores below 620. Your goal should always be to continuously work towards obtaining a higher credit score. However, this can take time.
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