Credit History & Your Loan Rate

Understanding credit and how it affects you in financial situations is very important. Credit is one of the biggest determining factors in getting a loan of any kind. Lending institutions and banks that loan you money want to know that you are willing and able to pay them back. They call this risk. The less risk it is to them the better. The thing about credit is that you can have too little credit as well. These institutions want to know that you have the ability to have credit and manage it.

They evaluate how much you already owe, how much you have available that is unused, how current and timely you are in paying your debts and whether you have recently applied for and received new credit.

You will most likely be asked to explain recent late payments, new inquiries and / or public records on your credit report. There are many pieces to a credit report. You have revolving, installment and mortgage debts. They usually read R, L or M next to the specific debt. Revolving debt is a debt that can be different amounts each time such as a credit cards based on the amount of the balance each month. An installment debt is usually a fixed debt such as an auto loan or furniture loan which is always the same payment each month. Mortgage debts are little more complicated. They can be either fixed or adjustable payments according to the type of loan you received when purchasing or refinancing your home.

Revolving debt does not have as much weight on your score and loan risk as an installment or mortgage debt. Inquiries can affect your score if they are in excess or if they have been pulled over a 30 day span. Public records definitely have a lot of weight on your score. A public record can be a collection, a tax lien, or even a bankruptcy or foreclosure. Collections can usually be paid in full and the lender will not think too much about it. A tax lien weighs a bit more on the risky side, not only because it can affect your title if you are refinancing your home, but also they tend to be a higher amount than collections. These will need to be released or satisfied in full.

A bankruptcy all depends on when it was released or discharged. Most lenders want 7 years since a bankruptcy, but they have become a lot more lenient on that rule in the last couple years. Now it can be a little as 2 years out of bankruptcy. Foreclosures are not so easy to get around. They need to be at least 3 years out and some institutions still say 7 years. All of which usually needs to have re-established credit afterwards in order to look as though you are trying to turn things around.

Lenders look at your credit overall, but they weigh a lot of their decision on your credit scores or fico scores as they refer to them in the business. You have 3 different credit bureaus that report your credit. They are Experian, Equifax and Trans Union. They all give you a score according to there standards which differ a little bit between bureaus. A good score is anything 720 and above, an average score can be 680 and above, if you are below a 620 it is considered sub-prime.

There are steps you can take to show you how to increase your credit score for the better over a short amount of time. The better your score the better rate a lender can give you or is willing to give you. Keep paying those bills on time and remember not all debt is bad debt. You can have good debt as well.

Cash Assets & Your New Home

In applying for a loan, assets are an important contributing factor. Lenders want to see that you have enough cash assets in order to make the loan workable. Some base the amount of assets they require off of your income, some just base them on the months in reserves for the loan they are looking to give you. Most would like to see at least 2 months in reserves. This means if your new proposed mortgage payment is going to be $1200, they want to see that you have at least $2400 in the bank.

When you are applying for a stated income loan, which are few and far between these days, lenders can require you to have at least 3 times your monthly income in the bank for reserves. This is not as common, but not unheard of either.

Your broker will ask you to provide 2 months bank statements which consists of 60 days assets. They will need all pages of these bank statements which are required by the lenders. If you have more than one bank account that you want to use for either down payment, reserves or closing cost you will need to provide those statements as well. If it is a 401-k or IRA quarterly statement they will only ask you for the last statement you received. Lenders only consider 60-70% of the money in a retirement account depending on which type of loan you are getting.

If you are purchasing a home you will be required to provide assets showing you have enough money for the down payment (3-20%) or more if you have it. You will also need enough for your closing cost and reserves. On refinances, you normally only need the closing cost and reserves.

Closing Cost
The “closing” or the “close of escrow” is the last stage in the transfer of title of real property from one person to another. Closing cost are fees that are charged by the broker, lender, attorney and third party vendors such as the credit agencies, a courier service and an appraiser of the property. These non- reoccurring fees associated with closing do not include all costs needed to complete the transaction. Closing costs do not include down payment, real estate taxes, insurance fees, and several other expenses.

If you have large deposits showing on your bank statements which are not income related the lender will require an explanation of the deposit. They want to know that the money put into your account is your money and not a gift from someone else. Certain types of loans allow gifts. Gifts are usually ok as long as it comes from a family member. They will ask you to provide documentation for the gift such as: a gift letter signed by all parties, a copy of the gift check and the donor’s ability to give the gift. If the money is not a gift, you will need to provide a paper trail of where it came from. For instance, if you sold a car and received a lump sum of money you will need to provide a “bill of sale” showing that amount.

An important thing to remember in applying for a loan is not to move money around. Keep your money where it is. Lenders like seasoning on assets. They want to see that the money has been in your account for at least 60 days. Save your money and do not make any large purchases right before or during a loan transaction.