Understand Credit Report's Relevance In Mortgage

One might ask why some lenders turn down a mortgage application, while others might consider it fit for approval. The answer may well lie in the credit report and credit score to be precise which plays a crucial role in loan sanctions.

Credit history is an important factor affecting loan granting decisions by the lender or mortgagee. As part of the pre-approval process, a detailed study is made in your financial history whereby the lender assesses your finances, your credit history and your investments. Your debt ratios are compared with the lender's standard while deciding on the loan approval. Your level of debt or credit history is taken as a parameter to assess your ability to make the monthly repayments. The credit history as represented by your credit report plays a very crucial role since some lending institutions may even turn you down because of incompatibility with their lending standards. Too much debt and poor credit is a common reason for refusing a mortgage application.

At times your application can not be rejected completely, but you can do with a loan amount lower than what you wanted or expected. The other terms and conditions of the loan might also not have proved worthwhile for you. All these could have been avoided if you had been a little more cautious and vigilant while placing your documents about your personal finances as reflected by records of your earnings, monthly expenses and debt. Among these documents the credit report is crucial to reveal your credit score.

While considering your application the lender will also get to analyze your credit report. This gives all details about your financial history, payment records, total debts and bankruptcies (if any). This information is used to find out your credit score or FICO score (a rating of Fair Isaac and Company). This is a composite number-a numerical assessment of your creditworthiness. These scores could range 300-900. But most people score falls between 600 and 700th Higher credit score makes you more attractive to the lender. Thus you will be more inclined to offer better rates and loan terms.

Several factors can affect the credit score. They can be broadly classified as:

a) The time you have had credit, outstanding credit, methods to repay this and how close you are to your credit limits.

b) Problems with credit which you can be as late payments and bankruptcies. The number and frequency of your past due must be considered.

It may be noted that almost 80% of credit reports contain errors. Getting for yourself a copy of the report beforehand will enable you to take steps to improve your score. You will take the opportunity to review the report and correct score to a fairly high level.

Some steps can be taken in this regard are:

a) To find out credit cards, there is a need for longer and closing the corresponding credit accounts.

b) Resolve outstanding accounts, if any.

c) Paying your bills, debt payments on time and in full, and reduce your outstanding loan.

d) Verifying all listed account numbers and getting assured that they are yours.

It should be noted that minor credit problems or difficulties that arise because of illness or temporary loss of income due to some unforeseen events will reduce your chances of getting the aspired loan only from some high cost lenders. Other lenders will hopefully be considerate enough to overlook these minor problems.

Despite the best efforts, there may still be some negative aspects of the report, which could not be abolished. In such cases, you to explain the situation to the lender. If at all it can not be explained as, perhaps, you have to make a larger down payments.

Getting to know how the credit record affects loan prospects, is towards making improvements in your credit report. Your loan prospects will improve, no doubt. It will take you a long way towards ensuring the desired mortgage loan.