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Risk factors/credit:
Risk factors/credit: Having high credit risk when shopping for a home mortgage or auto loan can be very difficult during times like these where lenders are becoming increasingly wary of high risk. There are three major risk factors involved in the lenders determining risk. They are your credit profile, loan to value (LTV) or down payment and debt to income ratio (DIR). There are other risk factors as well; the most notable has to do with what the collateral is like. An example is having a manufactured home as opposed to a stick built home. Manufactured homes have a foreclosure rate that is much greater than a stick built home thus increasing the risk of the loan.
This section will focus on credit. We should remember that we are asking someone to invest money based on the circumstances of your credit profile. The only reason someone would invest their money is because they expect a return on their investment. Thus, if you increase the risk it is natural that the rate would increase or some part of the loan will not be as desirable. One of the things that can be done to improve this is to make sure that your risk factors look as good as possible to the lender. Credit is perhaps the single most important factor in getting a loan. If you have bad credit then it may be necessary to work on improving your score before obtaining a loan. There are three reporting credit agencies Experian, Trans Union and Equifax. The credit agencies were designed to give lenders an accurate risk profile based on the experiences of an individual borrower. Most lenders take the middle score of the three agencies. There are some lenders that go off of the high score and some that use the average of the three. Many banks just use one of the credit agencies for their scoring. It is likely that each score is slightly different. It is very important to have at least two high credit scores when shopping for mortgages as this will give you the most options.
According to Fair, Isaac, the breakdown of your FICO score is as follows: · 35% of the score is determined by payment histories on your credit accounts, with recent history weighted a bit more heavily than the distant past; · 30% is based upon the amount of debt you have outstanding with all creditors; · 15% is produced on the basis of how long you've been a credit user (a longer history is better if you've always made timely payments); · 10% is comprised of very recent history, based on your efforts to obtain loans or credit lines in the past few months; · 10% is calculated from the mix of credit you hold, including installment loans (like car loans), leases, mortgages, credit cards, etc.
The scores range anywhere from 350 to 850. Typically a credit score of 740 or above will give access to the best rates in different programs including stated income and no document loans.
Credit help:
If one of the credit agencies is reporting something on your report incorrectly dispute it directly with the credit agency. There is no reason to dispute inaccuracies with the creditor because the creditor would then have to inform the credit agencies. The fact of the matter is the creditor is often to busy, they are trying to increase their profits not slow them down. So the alternative is a good one; dispute it with the credit agencies. The credit agencies are obligated by law to look into your disputes. If you do not supply them with reasonable proof of your dispute then they will send out a letter to the creditor asking them if they are reporting things accurately. The creditor then has 30 days to respond to the credit agencies letter before they take the action you requested. So remember the creditor is often very busy. It may pay to dispute an inaccuracy even if you don’t have sufficient proof. The credit agencies can and will accept a response to the letter at any time in the future. So it is possible for something to come off of your report and go back on if the creditor provides proof that your dispute is not accurate. This doesn't occur to often. Send in your credit disputes to the addresses on this page.
We know that 30% of you credit score is based upon the amount of debt you have outstanding with all creditors. However what Fair Isaac doesn't mention is that this is really only involving revolving credit. How it is actually looked at is based on how much you can borrow to how much you have borrowed. If you are maxed out on credit cards you are losing a lot of points because being maxed out shows that you are a high risk. Conversely if you have credit cards with low balances you are gaining a lot of points because if you need money the creditors know that you can get it. This area alone can make the biggest impact on your credit report. I would caution anyone from getting a revolving home equity line of credit or HELOC for this reason. If you have a maxed out HELOC that is revolving at fifty thousand that would mean that you would need another fifty thousand in revolving credit available just to be at a 50% ratio which would only get you about half of your total points of outstanding debt.
Useful links
Mortgage note/ adjustable rates