Using Credit

The borrower must have sufficiently good credit to justify making the loan. All current and recent credit, within the past 6 to 24 months, must be verified in writing. All lenders use several means to find out whether borrowers are in over their heads at that particular time. Many borrowers simply don't recognize many of their debts as such.

A symptom of the times is the use of plastic as if it were money in the bank. Credit card obligations and other revolving credit are definitely considered as debt, even if they are paid off every month without incurring any interest charge. If borrowers use credit regularly, then they will be making a regular payment of some type.

The Credit Report Reality Check

The Standard Mortgage Credit Report is the only credit report accepted by all investors in the industry. It reports all credit of record for the past seven years. The lender is most concerned with credit within the past one to two years, but the seven-year history will give a good idea of the borrower's credit habits. It will show the following:

1. The borrower's name, address, employer for the past two years, age, marital status, gross income, and social security number.
2. Names of all available credit references with opening date of the account, highest credit amount, current amount, required payment, term of the credit, current credit rating, when information was given, period of time that the rating covers, number of late payments (if any), how late (30, 60, 90+ days late), dates they were late, any credit inquiries within the last 90 days (to catch any potential new, unlisted credit) and any credit shown on public records (judgments, bankruptcies).

With this information the lender can get an impression of the borrowers credit habits. Do they consistently borrow to their maximum limit? Do they have several credit cards that are used frequently? Do they make their payments on time? No one is perfect. At one time or another everybody has made a late payment, by mistake or intentionally.

What is most important is when, how many, how often, and on what debts late payments occurred. If you have one or two late payments in the past 12 months on a bankcard, and nothing else was late, that fact will generally not disqualify you for a loan. If you had late payments on the bankcard, the car payment, and other debts, that is, you have established a history of making late payments in the recent past, then your loan application may not make it past the credit report before it is denied, unless you have an acceptable explanation.

Why were the payments late? If it was by habit, or because the borrowers have shown that they cannot handle the amount of credit given, then it's evident that the borrowers are not in a position to take on additional debt. Some type of economic catastrophe, such as loss of employment, medical expenses, or other unexpected expenses can help to offset the poor credit.

Even lenders can have a little compassion. It is up to the borrower to document why the payments were late and to prove that it is not a common practice. It is the lender's responsibility to tell the borrowers exactly what will be needed to accomplish this task and to guide them through it.

Unfortunately too many lenders do not take this responsibility seriously, and it is the borrower who may suffer. You cannot assume that the lender will hold the borrower's hand through this process: only the good ones will make the extra effort.

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