This guide was designed to help you determine your possible credit rating
and what type of terms you can expect from a Mortgage lender. Please keep in
mind this is only a general guide as some lenders place different grades
based upon their own method of evaluation.
Credit:
Your credit report may be broken down into three main categories:
Mortgage Credit: Your payment history on your existing or previous
mortgage. The past repayment history on mortgage debt can be a good
indication of a borrowers attitude toward mortgage obligations. Payment
history on mortgage debt is very important in determining your credit grade
and weighted significantly by the credit bureaus, and especially Mortgage
lenders. (Obviously this relates to people who have owned a home
previously.)
Consumer Credit: This category relates to installment and revolving
credit. Installment credit encompasses longer-term credit with structured
payment plans, such as car loans, leases, student loans and other types of
loans with finite structured repayment terms. Revolving credit encompasses
department store and bank credit cards. Generally, payments received 30 days
past the due date are reflected in the credit report as late.
Public Records: The third category relates to public records such as
previous bankruptcies, collections, foreclosures and judgements. The typical
A borrower cannot have any bankruptcy within past 2-10 years. The D borrower
could currently be in bankruptcy or foreclosure.
The more serious the credit problems, the further the grade decreases (see
below). As the grade on loan’s decreases, lenders generally assess higher
rates and fees. The greater the credit risks the higher the interest rate a
potential lender may charge.
Debt Ratio
Besides credit considerations, lenders review the capacity of the
borrowers to repay the mortgage obligation. Lenders calculate the debt ratio
by dividing the total monthly debts (the housing expenses for the proposed
loan plus the borrower other monthly credit obligations) by the total
monthly income. If a borrower has a low debt ratio, the grade will be
higher. Conversely, if a borrower has a high debt ratio, the grade will be
lower.
Max LTV
Loan-to-Value Ratio (or LTV as it is commonly referred to) is the
ratio of loan amount to the appraised value (or the sales price, whichever
is less) of a property. For example, a loan of $100,000 on a property valued
at $200,000 is at an LTV of 50%. The higher the LTV, the more stringent a
typical mortgage lender may become on credit and debt ratio. The A borrower
can get 100% LTV loan and in some cases even 125%. For the D borrower
maximum loan-to-value ratio averages 65-75%.
Credit Score
Mortgage lenders and other creditors frequently use credit scores,
known as FICO scores, to determine the credit risk. The higher the credit
scores the better the credit risk.
FICO stands for Fair Isaac Company, the company that created the original
scoring system. Each credit bureau has its own unique system that allows
them to offer a score based solely on the contents of the credit bureau’s
data about an individual. However, a numerical score at one bureau is the
equivalent of the same numerical score at another. Thus, a score of 700 from
Experian indicates the same creditworthiness as a score of 700 from Trans
Union or Equifax, even though the calculations used to determine those
scores are different at each bureau. The scores range from 375 to 900 points
and in general a score of 650 or above usually indicates a very good credit
history. Average FICO scores fall into the range between 620 and 650.
The interest rate a lender will charge depends on these four main factors.
If all the factors are great, the loan is assigned A grade and therefore
qualifies for the best interest rate. If even one of the factor is not up to
the set standard, the quality of the loan is downgraded to A-, B, C, or D
paper. D paper refers to what is known as hard money loans which are mostly
based on the equity in your home and not on your credit. A lender who is
making a B, C or D paper loans is taking a higher risk since there is an
increased likelihood of the loan defaulting. The lender is compensated for
higher risk by charging the borrower a higher interest rate. Please keep in
mind that the interest rates quoted for A-, B, C or D papers could vary
vastly from lender to lender.