Credit Score Help and the 5 Cs of Credit the Banks look at to approve A Mortgage

Sunday Nov 25th, 2018

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I have been getting a lot of question on what the banks and other lending institutions consider under the bank act when making a decision on a mortgage application. A lot of factors are considered here but when a home buyer is looking to have the best chances of getting the home of their dreams the financing part is the next biggest thing besides the home and the location. This is why knowing the basics behind what lenders are looking for will help you better understand the process and what the bank considers when making their decision. 

Credit Score Help:

The Secrets of Raising Your Credit Score

Why is it important to learn the secrets of raising your credit score? Because your score helps determine whether you'll be able to get credit and the interest rate you'll qualify for. If you are planning on making any major purchases within the next few years (such as a home or car), you should start working on improving your credit score now. Since credit scores fluctuate over time, the steps you take now will reflect positively in the future. Credit scores place the most emphasis on information that is reported within the last 24 months, so the actions you take now can really help. This means that even if you currently have a bad credit score, it won't haunt you forever if you work on improving it. Below are the main areas to work on when trying to improve your credit score.

Correct errors on your credit report

One of the first places to begin improving your credit score is by checking your credit report for errors. This includes such things as accounts that don't belong to you, or paid accounts that are still showing a balance. Having inaccurate information removed from your credit file can really boost your score, so it's worth the effort. To correct any errors, you will need to contact all three credit bureaus to dispute the information.

Improve Your Payment History

Since your payment history accounts for 35% of your credit score, you need to make sure that all your accounts are up to date and don't show late payments. Pay off past due accounts, and then concentrate on paying your bills consistently before the due date. If you tend to forget to mail your payment in on time, consider automatic bill payment options (either through your bank o! r online).
You may be wondering how liens, judgments, collection s, and bankruptcy will affect your credit score. I won't lie to you. These bad marks will seriously lower your credit score, but not indefinitely. Since this information may only be reported for 7 to 10 years, it will eventually drop off your record. And, if you can consistently pay your bills on time for two or three years, the impact of these negative items will not be as great.

Lower Your Debt Ratio

If you've extended your credit to the limit, it will have a negative effect on your credit score. By keeping your credit card balances low (less than 20% to 30% of the available credit), you'll not only be in better financial shape, but you'll also bring your score up.
It's common to carry a large balance on one card and have another card that you either don't use, or pay off in full every month. If you will be applying for a loan in the near future, you might consider transferring some of the balance to the other card to even out! The percentage of available credit on each card.

The next thing that you want to concentrate on is paying off your existing balances. Try paying more than the minimum amount due on your accounts, and if possible, pay the balance in full. Once you pay off an account, don't close it because it will raise your debt ratio due to the fact that you will have less available credit.

Another way to temporarily boost your credit score is to not use your credit cards for a few months before you apply for a loan. Because creditors provide a monthly statement to the credit bureaus (which may occur before your payment is received), your account may show a balance, even if you pay your statement in full every month. By paying with cash for a month or two before you apply for a loan, these accounts will show either a lower balance or not balance at all. The end result is that your debt ratio will be lower, which will raise your score.

 

Improve Your Length of! Credit History

If you've been thinking about closing those old cards that you don't use any more, don't do it until after you've qualified for a loan. Closing old accounts can lower your credit score it because it decreases the length of your credit history. You want to keep long-standing accounts open because it shows a longer history of established credit. If you are determined to close out accounts, make sure that you keep the oldest one open (it doesn't matter what the interest rate is if the balance is paid off).
If you don't currently have any credit accounts showing on your credit report, opening a low balance credit card can actually boost your credit score. Also, if your credit history is less than three years old, work on establishing a good payment history by paying your bills consistently on time.

Limit New Credit Accounts and Inquiries

Every time someone looks at your credit report, it shows up as an inquiry.
There are two types of inquiries, soft and hard. If you order your credit report, it is counted as a soft inquiry, and won't affect your credit score. Other types of soft inquiries include inquiries for promotional offers (such as credit cards or insurance), account reviews by your current creditors, and internal inquiries by the credit bureaus.
Hard credit inquiries occur when you authorize a company to review your credit report. This happens when you apply for a bank loan, credit card, lease, or cell phone. Hard inquiries may also appear if the CRA is auditing you or if a collection agency is trying to collect a bad debt. Hard inquiries deduct from your credit score, so you want to keep them to a minimum. If you will be shopping around for the best rate on a loan, do it within a short period of time. Inquiries made within a few days of each other will generally be counted as one inquiry.

Diversify the Types of Credit In Use

This area accounts for 10% of your credit score, and the different types of credit will affect your score differently. Having a credit card that you consistently pay on time (with a low balance) will help your score.
Installment loans, such as a mortgage or car payment, can also help your rating if your payment record is good and you have paid the balance down.
Cash loans and finance company credit may deduct from your score because it appears that you might be a high risk and can't qualify for mainstream financing. The best mix is to have one or two major bank credit cards and one or two installment loans.

How long does it take to improve your credit score?

This is not an easy question to answer because it depends on how you handle all aspects of your credit. Generally, there's not a lot of fluctuation during a short period because your score is mainly based on information reported within the last two years. By consistently paying your bills on time, you can see an improvement within 6 to 9 months.

But don't get discouraged. It is worth the effort to improve your credit score, because a few points can mean the difference between the best rates and a sub-prime loan. When you are working on improving your credit score, aim to have no late payments or derogatory items on your credit report for at least 12 months (preferably 24 months). Also work on paying down your outstanding balances and don't apply for new loans.

Persistence in following the secrets of raising your credit score will benefit you in a lot of ways. A good credit score will help you qualify for the best credit, jobs, insurance, and more. Plus, if you take the steps to improve your score, your financial life will be much easier as a result.

 

The 5 C’s of Credit: What are the Five C’s Of Credit that lenders look at:

There are always easy and tough things in life. Credit should not have to be one of them. Though credit is one factor considered when getting a mortgage there are other factors considered. It is not just a score that rates your ability to make payments on time. There is a method used by lenders to determine a borrower’s credit worthiness that weighs five different categories to gauge the possibility of default: capacity, capital, collateral, credit and character. Here is an explanation of them all

Capital

Capital in plain terms is the amount you have saved as a down payment – an indication of how invested you are in purchasing a property. You capital will show to potential lenders your ability to save and accumulate assets. Lenders use a loan to value (LTV) measurement to determine the amount of capital you need as a down payment as well as to decide on the rates and terms of your mortgage. In the field of credit risk the lower the LTV the lower the risk for the lender.

Capacity

This port of the 5 C's of credit it is capacity to be the most critical of the five categories; it refers to the borrower’s capacity to repay a loan. The lender’s main concern is how you intend to repay your loan and will consider your income (from all sources) against your monthly expenses. This is represented as TDS Total Debt Service Ratio and GDS Gross Debt Service Ratio.

Collateral

When you consider collateral this is for the lender the security of the mortgage being lent out. The property, its value, location and characteristics are one form of security; the lender wants to know that a property is marketable and can be resold if necessary. Another aspect of collateral is also a person or persons who can guarantee the loan or other wise known as co-signers.

Credit

Now when you think about credit and the applicant's current and past payment history this shows the lender a summary of your repayment history over a period of time. The lender needs to feel comfortable in an applicants potential to make payments; by examining your payment history with existing credit relationships they can predict your predisposition to pay. This is the reason it is your credit score is the most dependable measurement a lender can use to determine your likelihood of payment.

Character

Then there is Character; this is where the lenders will see you s the borrower are trustworthy and will meet your obligations to them. The factors lenders consider are length of employment, your actions taken to save and use credit responsibly to establish your character and determine whether you are a borrower that they can trust with their loan.

This is why it is important to take the advice of your mortgage professional to sit down with you and go over the best mortgage based on your wants and needs. Armed with the right information will ensure when you do apply for the mortgage you will have the lenders offer you their best rate and terms possible.

Questions or concerns; Call or Text: 905-903-0012 or Email us JimAmitofski@SoldWithJim.com 

 

Jim Amitofski - Real Estate Sales Representative & Advisor

The JIM AMITOFSKI Real Estate Group - Century21 Leading Edge Realty

www.SoldWithJim.com


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