Everything You Need To Know About Credit Reports

A consumer’s credit report is a synthesis of the consumer’s credit accounts, payment histories, accounts referred to collections, inquiries into a consumer’s credit file and public financial records, like bankruptcies. The credit history documented in a consumer’s credit report is collected by a consumer reporting agency. The three largest nationwide consumer reporting agencies are Equifax, Experian, and TransUnion.

Using information contained in credit reports, these agencies also produce credit scores— numbers that signify a consumer’s relative likelihood of repaying a debt compared to other consumers. Credit reports and scores are widely used by lenders to determine consumers’ eligibility for credit and to set pricing for loans based on credit risk. [1]

What you Need to Know

In order to obtain home financing, lenders must obtain a credit report for each borrower on the loan application who has an individual credit report.

Number and Age of Accounts

Lenders will review your credit report to determine whether you have an older established credit history or a newly established credit history, and whether there are a significant number of recently opened accounts or a mix of new accounts and older accounts.

Credit histories that include older, established accounts generally represent lower credit risk. However, an older, established credit history that includes a significant number of recently opened accounts may indicate that you are overextended, and thus will represent a higher credit risk.

A newly established credit history does not automatically represent a higher credit risk, since making payments as agreed on newly opened accounts represents less of a risk than not making payments as agreed on older, established accounts.

Payment History

Credit histories that include no late payments, collection or charged-off accounts, foreclosures, deeds-in-lieu, bankruptcies, or other public records information represent a lower credit risk.

Credit histories that include recent late payments represent a higher credit risk than those with late payments that occurred more than 24 months ago. When there are payments that were 30, 60, or 90 days (or longer) past due, the lender must determine whether the late payments represent isolated incidences or frequent occurrences.

Delinquent payments must be evaluated in the context of the borrower’s overall credit history, including the number and age of accounts, credit utilization, and recent attempts to obtain new credit. For example, a credit history that includes delinquent payments along with recent inquiries and a high balances-to-limits ratio indicates a high credit risk.

Credit histories that include foreclosures, deeds-in-lieu, and public records information (such as bankruptcies, judgments, and liens) represent a higher credit risk. The greater the number of such incidences and the more recently they occurred, the higher the credit risk.

Credit Score

A credit score is a numerical value that ranks an individual according to his or her credit risk at a given point in time, as derived from a statistical evaluation of information in the individual’s credit file that has been proven to be predictive of loan performance. When this term is used by Fannie Mae, it is referring to the classic FICO score developed by Fair Isaac Corporation.

Minimum Credit Score Requirements

Each lender has his or her own minimum credit score requirements, but only a limited number of lenders will approve loans to borrowers with credit scores lower than 620.

Representative Credit Score

The representative credit score for the mortgage loan is determined based on the credit scores of each borrower and is used to determine loan eligibility and interest rate offered to you.

In the typical scenario where lenders obtain three credit scores, the lender will choose the middle score (e.g. 700, 700, 680 = 700). If the lender is only able to obtain two scores, the lender will use the lower score (e.g. 700, 680 = 680).

If there are multiple borrowers, the lender will take the applicable credit score for each borrower and select the lowest from the group and use that as the representative credit score for the mortgage.

Credit Pull

Lenders often refer to ordering your credit report as “pulling your credit”. When a lender pulls your credit, it is considered a “hard pull”. This is a request that merges the reports from all three consumer reporting agencies. If there are too many hard pulls of your credit, it can have a negative impact on your credit score because most credit scoring models look at how recently and how frequently you apply for credit.

Other services, like Own Up, conduct “soft pulls”, which is a review of your credit file, including your existing accounts; however soft pulls do not affect your credit score negatively.

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[1] http://files.consumerfinance.gov/f/201502_cfpb_report_consumer-voices-on-credit-reports-and-scores.pdf

 

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