How a credit report is calculated and applied in the mortgage world
So you are ready to start shopping for a home. After determining budget, location and non negotiables for your dream home the next step to consider is your lending eligibility. Your credit report is the key to understanding the type and value of home loans you can expect. Home Qualified’s Ralph Dibugnara outlines the key factors that banks consider when extending loans.
1. Banks look at three bureaus to determine credit score. These bureaus, Equifax, Experian and Trans Union each have their own rating system for calculating scores. Banks will typically choose the median value of the three to determine credit score and mortgage qualification.
2. Your credit score will be the key factor in determining your interest rate. This is a fairly straight forward equation. The formula is this, the better your score the lower the financial risk you represent and ultimately the lower interest rate you will qualify for. A strong score is not the only element that determines your interest rate. Income, assets and percentage of down payment are all taken into account.
3. Banks will qualify your income based on the minimum monthly payments on your report. When reviewing trade lines such as credit cards, auto and student loans, a bank will use your minimum monthly payment reported.
We recommend obtaining a copy of your credit report before beginning the mortgage process. Having this information will help to clear up any inconsistencies, inaccuracies, collections, judgements or other derogatory items. Remember when reading your report that there is no problem that cannot be amended nor number improved. In this situation, knowledge really is power and the more you know and the sooner, the better for your lending potential.
If you have any questions about your credit report please check out our website for more information and reach out to us at (888) 883-8513 with any questions. Home Qualified is here to help.