Financing Your Home and Credit Information

Financing and Credit

Credit Basics
Generally speaking, "good credit" means paying your bills on time and maintaining a personal financial profile that helps to make lenders confident that you will make mortgage payments on time. Good credit also means that you are not "overextended" or borrowing so much that you are putting yourself at risk for financial problems. Good credit makes it easier to get a loan when you need it, and helps you get lower interest rates when you borrow.

Why is credit important?
Good credit makes it easier to get loans, credit cards, and better interest rates when you borrow. Credit problems, on the other hand, make it harder to get a loan or lower interest rate often when you could use some help the most. Unfortunately, credit problems don't go away overnight. Late payments a year or more ago can affect your credit history today. Major problems, like bankruptcy or a loan default, appear on your credit record for years.

How Credit Affects Rates
Good Credit = Lower Interest Rates
Any time a lender gives a consumer a loan, line of credit or credit card, there is a risk that the borrower may not repay the loan on time or at all. If a borrower doesn't repay the loan or pays late, it costs the lender a great deal of money.

Lenders use your credit history, along with information on salary, assets and debts, to predict how much risk is involved with the repayment of the loan. This is much like insurance companies using your driving history to predict your risk of having an accident.

About Credit Scores
Credit scores are numeric values that rank the risk of default by an individual according to their credit history at a given point in time. Your score is based on your past payment history, the amount of credit you have outstanding, the amount of credit you have available, and other factors. According to Fannie Mae and Freddie Mac, two of the largest purchasers of home loans from mortgage lenders, credit scores have proven to be very good predictors of whether a borrower will repay his or her loan.

Many lenders use credit scores to help evaluate loan applications. A credit score, however, is just one of many factors considered in the underwriting process. Lenders look at the entire picture. Even when a credit score is low, lenders often try to find other factors that could overcome the negative credit issues and satisfy their lending requirements.

Three national credit bureaus (Equifax, Experian and Trans Union) collect credit information and provide reports and credit scores to lenders. Lenders often use a "merged" credit report, considering the information and scores provided by all 3 of the credit bureaus.

Different lenders may have different standards for loan approval, based on credit scores and other factors. Because credit bureaus don't currently provide credit scores to consumers, it's important to talk with lenders about how your credit profile fits with their requirements and loan programs.