Thursday, November 10, 2011

Why is credit so important?

Since the starting of our mortgage crisis in the US (2007), credit is now more important than ever.  If your credit is bad, work on improving it (stay tuned for the credit improving post to come).  If you don't have or never used your credit, start!  If your credit is great, understand how to maintain it at that level. 

Did you know that insurance companies (auto and homeowner’s) now pulls your credit to determine your premium when this was irrelevant in the past? Why? Some of the few but important reasons are because of our current mortgage crisis.  So many people walked away from their homes (voluntarily or involuntarily), foreclosed, damaged their homes deliberately for claims or just couldn’t afford to pay that it negatively impacted the insurance company’s finances.     

Did you know that many of the employers are now checking your credit to determine whether or not to hire you regardless of the position? Why? Your credit history and score shows how responsible you have been or your current financial situation. Bad credit may also give an employer the “illusion” you are “desperate” to take from the company or their customers. Right or wrong…they will determine an opinion based on your credit.

Credit will also determine your deposit amounts, rates, approvals or denials for an apartment, cell phone, car, mortgage, student loans, and business loans. 

A lot to think about?

Let me add something else to those thoughts:

Some will say, “I don’t like using credit at all.  I use cash instead”.  Although, not having any credit is better than bad credit, an employer may likely hire John with a score of 655 showing recent positive payment and some level of responsible credit history than David with “N/A” for all his credit scores.  An employer can form an opinion on John with his 655 based on what they see, but cannot determine any opinion on David with a “N/A”.  So far as they are concerned, they can’t “figure” David out or have enough information to form an opinion. David is a stranger compared to John.  A credit report shows enough about your history including your employment and address history to the point someone can determine what good and bad times you have been through. 

Wednesday, November 9, 2011

What are underwriters looking for regarding my mortgage loan application?

Obtaining a home loan or mortgage is not as easy as it used to be. Due to the mortgage crash, underwriters are now asked to forensically review each file and each borrower. Although every loan product/program can differ with specific guidelines, what they are generally looking for is:

1.      A middle credit score ideally ranging from 640 and up (there are programs that allow you to have scores as low as 580, but are VERY difficult to qualify for)

2.      No collections within the last 24 months or preferably, none at all (Exceptions may apply)

3.      If you filed any kind of bankruptcy within the last 10 years, no derogatory credit after the bankruptcy.  There are always exceptions, but they must fall within guidelines

4.      Debt-to-income ratio around 43% (below 43% is ideal, above 43% - 55% is for the borrower with the higher credit score and better looking financial portfolio)

5.      No NSF’s (non-sufficient fund fee) in bank accounts, overdrafts and/or negative balances

6.      Reserves are preferred but may not be mandatory in some cases

7.      Consecutive 2 years work history within the same field

8.      Last 2 years tax return…FILED! (Watch out for all the write-off’s…it counts against your income!!)