Determining Your Credit Risk

One important step in qualifying for a home loan is for the lender to determine your credit risk. By looking at how you've managed credit in the past, the lender can assess how you're likely to handle the obligation of a mortgage loan. To find out, the lender obtains a credit report, merging results from all three of the following credit bureaus:

If you'd like Gwen Hoople to run a merged report for you, and review your credit status with you to make sure the information is current, complete and accurate, give her a call at 510 301 3037.

How does a lender evaluate my credit report?

The lender uses a credit scoring system which summarizes all the aspects of your credit report. This scoring system converts your credit information into a number that helps the lender determine how likely it is that you will repay the loan. Credit scoring is an objective process, based only on the information in your report. Things like age, race, religion, gender or marital status are not considered in determining this score.

How is my credit score determined?

Your credit score is based on the information in your credit report, incorporating the following factors:

• Your payment history with your existing debts. If you've paid your bills promptly and not skipped payments, your score will be higher.
• Your outstanding debt. The calculation takes into account how many consumer loans and open charge accounts you have, what the balances are and how much you've used of the total credit amount available to you.
• Your credit history. If you've had credit for a long time - and managed it well - you get a higher credit score. If you do not have a long history of credit, or you have only a few credit accounts, your lender may also be willing to consider other types of debts, such as rent and utility payments.
• The number of inquiries into your credit status. Every time you apply for credit, whether it be for a car loan, a house or a new credit card, that company will run a credit check with at least one - and if you're buying a house up to three - credit bureaus. These inquiries are reported on your credit report. The lender will want to know whether these inquiries reflect an increase in your credit use which might make you more of a credit risk to them.
• The types of credit you have, such as personal loans, automobile loans, credit cards, etc.

Credit scoring systems were developed by looking at how millions of consumers manage their credit. Over time, these scores have provided a reliable indicator of whether a consumer can manage credit and is likely to repay loan obligations.

What can I do to ensure that I have a good credit score?

Your credit score can't be changed quickly, unless you find errors or inaccurate information on your credit reports. These should be reported to the credit bureau, and explained to your lender. Occasionally, people become the victims of identity theft, and must take steps to correct the picture in the report created by someone using their credit card number or otherwise masquerading as them while running up debts.

Over the long term you can make significant improvements in your score. Here's how:

• Pay your bills on time. If you frequently pay bills late, lenders may not want to extend you credit.
  
• Avoid overusing your credit cards. If you appear to be overextended and use all of your available credit, even if you still pay all your bills on time, lenders consider you a higher risk - again, based on the histories of millions of consumers.
  
• Hold off on making other major purchases on credit just before you apply for a home loan.