The
importance of credit report and credit score in determining whether a
mortgage application will be approved or turned down is explained here.
Various measures which can be taken to help improve the credit score
have also been suggested. The special aspects and significance of
credit report and credit score are focused upon. This will definitely
help one form an idea about improving one’s loan prospects and
progressing towards obtaining the desired mortgage.
One might be wondering why some lenders turn down a mortgage
application while some others might consider it fit for approval. The
answer may well lie in the credit report and the credit score to be
precise which plays a crucial role in loan sanctioning.
Credit history is an important factor affecting loan granting decisions
by the lender or mortgagee. As part of the pre-approval process a
detailed investigation is carried out into 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 for judging 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 rating is a common reason
cited for turning down a mortgage application.
At times your application may not be rejected altogether but you may
have to settle for a loan amount lower than what you desired or
expected. The other terms and conditions of the loan might also not
have proved worthwhile for you. All these could have been avoided had
you been a little more careful and vigilant while placing your
documents about your personal finances as reflected by records of your
earnings, monthly expenses and debts. Among these documents the credit
report is of prime importance which reveals your credit score.
While considering your application the lender will also get to analyze
your credit report. This provides all details about your financial
history, payment records, total debts and bankruptcies (if any). This
information is used to work out your credit score or FICO score (a
rating of Fair Isaac and Company). This is a composite number-a
numerical rating of your credit worthiness. These scores may range from
300-900. However, most people’s score fall between 600 and 700. Higher
credit scores make you more appealing to the lender. Thus, you will be
more likely to be offered better rates and loan terms.
A number of factors can affect the credit score. They can be broadly classified as:
a) The length of 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 may be having like late payments and
bankruptcies. The number and frequencies of your delinquencies is to 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 for improving your score.You will be availed of the
opportunity to review the report and rectify the score to quite an
extent.
Some steps which can be taken in this regard are:
a) Finding out credit cards which are not needed anymore and closing the corresponding credit accounts.
b) Settling outstanding accounts, if any.
c) Paying out your bills, debt payments on time and in full and reduce your outstanding credit.
d) Verifying all listed account numbers and getting assured that they are yours.
It may be noted that minor credit problems or problems cropping up due
to illnesses or temporary loss of income due to some unpredictable
occurrence will restrict your chances of getting the aspired loan only
from some high-cost lenders. Other lenders will hopefully be
considerate enough to overlook such minor problems.
In spite of the best efforts there may still be certain negative
indications in the report which could not be done away with. In such
case you need to explain the situation to the lender. If at all it
cannot be explained then, perhaps, you have to make greater down
payments.
Getting to know how credit record affects loan prospects, proceed
towards making improvements in your credit report. Your loan prospects
will improve, no doubt. It will take you a long way towards securing
your desired mortgage loan.
