Dean Rizzi

Your Credit History
October 20, 2008 ·  

Underwriters look carefully at your past payment record as shown on your credit report. Credit reports are ordered at the beginning of the loan process and again just prior to closing to insure that you have not incurred any additional debt that could affect your qualification for the loan. That is why it is so important that you avoid buying anything large until after your loan has closed escrow.

What does my Credit Report show?

 Your credit report shows open accounts, closed accounts and any derogatory accounts you may have. On open accounts, the credit report indicates if the account is revolving (like a credit card) or installment (like a car loan). It also gives a rating for each account to show if you pay as agreed, or if you have been late on the account. There are some items that may appear on your credit report that will require further explanation from you. These include:

  • 1) Credit Inquiries

If you have recently applied for a credit card, car loan, etc., an inquiry from the company you applied with may show up on your credit report. We will need a letter of explanation from you if you did obtain a loan. We will also need the paperwork in order to determine what the monthly payment and balance are.

  • 2) Late Payments

Any and all derogatory items that show up on your credit report will require a written explanation from you.

  • 3) Judgment, Liens and Collections

A written explanation is required and the judgment, lien or collection will have to be paid off prior to close of escrow if it is not marked satisfied on the credit report. See the section of “Your Debts” for details on paying these items off.

  • 4) Bankruptcy

Bankruptcies must be discharged for a minimum of two years. We will need a letter of explanation and complete bankruptcy papers including the schedule of creditors and the discharge. You must also have reestablished excellent credit since that time.

Writing an Explanation Letter

A letter (addressed to your loan agent) explaining late payments or derogatory credit should include the following points:

  • The derogatory item was due to circumstances beyond your control.
  • It was an isolated incident and will not happen again.
  • It was not a result of credit abuse or over-extension of financial means.

 

What the Underwriter looks for on a Credit Report ?

Generally, the underwriter is looking for the intent to have excellent credit. An excellent credit history does not have to be a perfect or spotless credit record. A minor instance of poor credit or a late payment can usually be explained as long as there are plenty of other accounts that have good payment records. This proves your intent to have excellent credit. What underwriters do not like are patterns of late payments. For example, if you had late payments consistently over the last three years or had late payments after a bankruptcy, your Loan Application Package may not be looked at favorably.

YOUR DEBTS

 

What debts count against you in qualifying for a home loan? Typically car payments, student loans, credit union loans, revolving charge accounts, real estate loans, stock pledges, alimony, child support, un-reimbursed business expenses, and negative rental income are counted. It is important that you avoid incurring any additional debt during the loan process since credit reports are ordered just prior to loan closing.

Paying Off Debt

If your loan agent requests that you pay off some of your debt, pay close attention to the procedure outlined for you. You will probably be instructed to take your statements to the title company and have them pay off the debts.  The reason for this is so that we have proof that the bills are actually paid off. If you send in a check to pay off the bill, we may not receive proof that is paid off in time to close your loan and your qualification may be in jeopardy.

Circumstances that Require Additional Documentation

You may have circumstances that make it necessary for us to request additional documentation from you. Some of these circumstances include:

  • 1) Co-Signed Accounts

If you co-signed for anyone else on a loan, we must document that you do not make the payment so that we do not count it against you. We usually need a letter from you and a letter from the other party stating that they make the payment. We will also need 12 months worth of cancelled checks to prove it.

  • 2) Undisclosed Debt

Any debt that you have not mentioned on your application that shows up later on your credit report, or on a verification of deposit form, will need to be explained by you in writing.

  • 3) Alimony or Child Support Obligations

If you owe alimony or child support, we will need complete copies of your divorce papers or legal separation agreement. The amount shown on the court papers is what the lender will use as a debt.

We may also ask you for statements on your credit cards to show what your minimum monthly payment is, so we do not have to count 5% of the balance against you. This often helps with your qualification for the loan.

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Comments

One Response to “Your Credit History”

  1. Michael Monozon on October 20th, 2008 9:01 am

    That was a great explaination, associates should copy that and share it with their customers. thank you

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