Chicago, IL - Your credit profile has always been a big factor in qualifying for a loan, but with loan quality problems in the mortgage industry the underwriting is becoming increasingly tight. One recent change is Fannie Mae and Freddie Mac’s move to risk based pricing. This means those with credit scores that used to be considered good but not outstanding will need to pay more for their mortgage. The private mortgage insurance companies have taken on similar policies. These changes mean that good credit is more important than ever before for both qualifying for a mortgage, and getting a mortgage for the lowest rate and cost.

Part of my mission here at Illinois Mortgage Rates and News is consumer education. Credit can be a confusing topic. Most people think that all they need to do is pay their bills on time. But good credit is much more than that. In order to understand and improve your credit profile you need to know how the credit system works and how to use it to your advantage. This is a big topic, so I’m going to break this topic up into several posts. I will cover how the credit system works, how banks and mortgage companies look at your credit, what goes into your FICO scores and how to fix mistakes and problems in your credit rating.

It’s hard to function in America without good credit. Good credit is not just about buying things, either. Have you applied for a new job lately? Many employers are now running applicant’s credit before hiring. Auto and home insurance rates are tied to credit scores, too. But if you want to get a mortgage at the best terms, good credit is crucial.

That doesn’t mean you’re out of luck if you have a few late payments on your record. Your overall credit pattern is the key, not just isolated incidents. And even if you have had serious problems in the past, there are still ways you can buy.

Your credit record is compiled by 3 companies, Equifax, Experian and Trans Union. These companies are called credit repositories. Their business is to gather information from financial institutions and businesses throughout the country and then sell this compiled information back to the retailers and banks so they can use it as a basis for their credit decisions. Each repository does this independently of the others, so your credit profile and scores will be slightly different with each. If you are applying for credit at Home Depot or Best Buy, they will usually only pull from one repository. When we run a mortgage credit report we pull a tri-merged report which draws from all 3 credit repositories.

Your credit report is a record of all the credit you’ve built up over your lifetime. (Is this the real permanent record your teachers warned you about back in school?) Your credit report gives a list of all the accounts you have now, as well as all the accounts you have closed. It shows the balance of each account, the credit limit, your payment history showing late payments as 30, 60, 90 or over 90 days late, and any past due balance you still owe, when the account was opened and when it last showed activity. It also shows a record of bankruptcies, judgments, and foreclosures you may have had.

Back in 1992 when I first got into the mortgage business, all this credit information was underwritten manually by a mortgage underwriter. The underwriter would base their loan decision on how well the borrower conformed to established credit guidelines. There were guidelines, but it came down to a judgment call on the level of risk the loan carried, and some underwriter’s would accept more risk than others.

The underwriter still reviews the credit, but much of the decision is now based more on credit scores and automated underwriting decisions. Still, it is all about risk. In the next installment I will talk about credit scoring and FICO scores, how they measure risk and what you can do to show yourself in the best light.

If you are even thinking about getting a loan, the first thing you need do is get a copy of your credit report and see what it has to say. I will go over this in depth later, but if you want to see your credit on your own, there are a couple of ways to get a copy of your report. By law, each repository has to give you a free copy of your credit report once each year. You can get the reports at annualcreditreport.com. These reports will give you all the data of the report, but they won’t give you the credit score. To get the scores you will need to pay. You can also order a copy of each from the repository websites, or you can get them all for a fee at Myfico.com.

In the next post here at Illinois Mortgage Rates and News, I will cover more on credit scoring and what goes into the FICO score.

Here are the other installments in this series:

Part 2 - Fico Scores and How They Work

Part 3 - 10 Ways to Raise Your Fico Scores and Improve Your Credit

Part 4 - Fixing Mistakes and Cleaning Your Credit Report

Illinois Mortgage Rates and News

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