How Credit Works

Get Prepared Now.
Buying a new home can be one of the most exciting and rewarding experiences of your life. The mortgage process requires many steps, however, and your experience will be smoother if you arm yourself with facts before you begin.

Credit is Important.
Once you apply for a mortgage loan, the lender will review your credit record to make decisions on approving your loan and offering you rates and terms. Your credit record traces how well you have handled credit in the past and how you are using it today. The better your credit record, the better rates and terms you will be offered. But having slow or poor credit does not mean you will not be able to secure a loan.

Three major credit bureaus in the United States track your credit record: Equifax, Experian, and Trans Union. These agencies collect information about your payment history to your lenders, such as banks, credit card issuers, retailers, and other lending groups. Some credit accounts you might have are your bills for charge card accounts, student loans, auto loans, apartment rentals, and even utilities.

When you apply for a loan, the lender buys a credit report from one or more of the credit bureaus. The lender analyzes the information to decide whether to offer the loan. If approved, the lender will offer you rates and terms based upon your credit rating.

The better your credit record, the better rates and terms you will be offered. But having slow or poor credit does not mean you will not be able to secure a loan.

Check Your Report.
Your credit report from one bureau will not necessarily be the same as your credit report from another. Although many national lending institutions report consumer credit information to all three bureaus, smaller banks and other credit grantors may report to only one, or even none. Thus, each bureau may have different information to compile your report.

Your credit record is an extremely important part of the mortgage process because it determines the type and amount of loan you can obtain. Before you approach a lender, it would be wise to obtain copies of your credit reports from all three bureaus to check them for accuracy and know where you might stand in a loan approval.

Information in a Credit Report.
A consumer credit report contains four types of information: identifying information, credit information, public record information, and inquiries. It does NOT contain information about your race, religious preference, medical history, personal lifestyle, personal background, political preference, or criminal record.

Your identifying information includes basics such as your name, current and previous addresses, Social Security number, year of birth, current and previous employers, and spouse's name.

Your credit information includes credit accounts or loans with banks, retailers, credit card issuers, and other lenders.Public record information includes any information that is contained in state and county court records, such as bankruptcies, tax liens, and monetary judgments.

Most credit and public information remains on your credit report for seven years. Bankruptcies can remain on your credit report for up to ten years. If there is inaccurate information in your credit report, you have the right to dispute it and have it removed.

Inquiries are your applications to other credit grantors applying for new credit. Such inquiries and applications could result in additional debt for you. Potential lenders often view multiple recent inquiries as a sign that you are overextending yourself. Most inquiries stay on your credit report for up to two years.

How a Mortgage Report Differs.
A mortgage report is a special credit report for home loan applications. Each report is compiled from credit reports from two or three credit bureaus. The mortgage credit company then verifies specific information such as employment, credit account balances, and public record information.

Who Can Check Your Credit Report.
Federal law carefully regulates how credit reports can be used and by whom. Individuals have the right to obtain their own reports. Businesses must meet several requirements before they can access credit information, including proof of permissible purpose under federal law and a signed contract requiring the business to use the data properly. These businesses also must have current business licenses and are subject to periodic inspections by the federal government.