As we stated on our Mortgage Process page, it’s always a good idea to check your credit report and learn your credit score prior to applying for a mortgage.
Your credit report includes the following*:
- Identifying Information – your name, address, etc.
- Employment Information – your current employment as well as past employers
- Credit Information – how many loans, credit cards and/or other financial obligations do you have currently or did you have in the past as well as how they were re-paid… on time? in full?
- Public Record Information – have you ever been sued? Particularly, have you been sued by a creditor due to lack of payment?
- Inquiries – the number of inquiries for your credit report made by lenders. The more inquiries made, the more you just might look like a risk to mortgage underwriters.
*Your credit report does not include your race, religion, health, driving record, criminal record, political preference, or income.
Your credit report is a history of how you’ve paid back money that you have borrowed in the past or are currently re-paying. You’ll want to make certain that the information on it is accurate before asking us to review it. You have every right to know what information is found in your credit report and you are entitled to one free credit report within a 12-month period from each of the three nationwide consumer reporting companies, Experian, Equifax and TransUnion. Unfortunately, while you are entitled to a free copy of your credit report in that 12-month period, you are not entitled to receive a free credit score. The three credit bureaus listed above manage a website located at www.annualcreditreport.com, where you can get your free credit report but you’ll have to pay an additional fee to obtain your credit scores.** If you dispute an item on a credit report obtained using the free system, under the Fair Credit Reporting Act (FCRA), the credit bureaus have 45 days to investigate and – if an inaccuracy is found – to revise your credit report and possibly even your credit score.
**Do not contact the three credit bureaus individually. They will only provide you with your free credit report if you request it via www.annualcreditreport.com, by calling 877-322-8228, or by writing to:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
Once you’ve reviewed your credit report, you may or may not need to write a “letter or explanation.” There can be legitimate reasons for derogatory remarks on your credit report such as illness or unemployment or any number of financial difficulties and a letter of explanation is used to explain your difficulties in making your payments. Don’t make your own assumptions about your credit report. If you have re-established your credit and your payments have been on time for one year, you may just have a satisfactory credit history that will allow you to qualify for a mortgage.
In addition to your credit report, mortgage underwriters will look at your FICO credit score. Your credit score is used to grade your credit based on past delinquent accounts, negative payment behavior, your current debt, the length of your credit history, the various types of credit you’ve used (credit cards, previous mortgages, etc.) and the number of recent inquiries for your credit report by other lenders. Your credit score does not take into consideration your income, the amount of money you have in your savings account or the amount you may have saved for a down payment toward your home.
If you have a negative or derogatory credit score, every other aspect of your mortgage application has to be top-notch. You’ll have to show stability in employment. Lastly, it helps to be able to show several late payments within a short period of time rather than random late payments spread out over the years. Clearly, late payments over a short period of time would be a better indication of a short time of financial difficulty which is far better than showing years of sporadic late payments.
For more information on credit, be sure to visit How to Improve Your Credit.