What is a credit report?
Before your mortgage lender approves your home loan, they’ll want to make sure you’re a safe financing partner. A steady income and a good amount of savings will certainly help your case, but they won’t take your word for it. Lenders need proof of a strong financial background in order to hand over financing, which can only be provided via credit reports.
A credit report provides a snapshot of an individual’s current financial situation and their history of debt management. Closed loans, payment patterns and the status of current debts all appear on credit reports and factor into the overall credit score.
No matter what type of mortgage loan you decide to pursue, these reports will play a major factor in the approval process. Usually broken down into several sections outlining an individual’s financial history, these reports include personal information, ongoing debts and any record of previous credit report inquiries.
When applying for a loan, lenders will typically require a credit report to determine the applicant’s eligibility and ability to make scheduled payments. These reports also help creditors gauge the associated risk of issuing a loan and establish appropriate mortgage interest rates.
What information is on a credit report?
Credit reports are usually divided into several sections that provide a full picture of an individual’s financial history:
- Personal information
- Public records
- Account information
The top section of a credit report will usually include the individual’s personal information, such as their name, social security number, address and date of birth.
This section will also include in the applicant’s employer, job title and the date they were hired. Previous employers and job titles may also appear in this section.
This section of someone’s credit report will describe instances of bankruptcy, lawsuits, property liens and any other record of adverse credit history.
Lenders will examine public records on a credit report to determine if a potential borrower has demonstrated a pattern of poor financial management. Past foreclosures and repossessions of property will appear in this section as well, which may convince a lender to reject a loan proposal.
A new employer may request a credit report to determine if a prospective hire has a history of delinquent behavior, such as judgements that indicate fraud. This information will also appear in the public records section.
Most adverse incidents will usually remain on a credit report for seven years, while certain types of bankruptcy and tax liens might appear in public records for up to 15 years.
Account information on a credit report will include information on the status of an individual’s existing accounts. Ongoing debt payments, closed loans and the status of current credit account information will all appear in this section.
Information in this section is also referred to as “tradelines.” This term is used to describe the credit accounts that appear on a report. Each separate account will have its own tradeline, which provides details about the creditor as well as the status of debt.
In addition to information regarding ongoing debts, credit reports will also list any instances where the borrower applied for a loan. When someone applies for a line of credit or personal loan, the lending organization will conduct a query into their credit report. A record of this query can remain on the report for up to two years, letting other lending organizations know that this individual has been seeking out a loan elsewhere.
Multiple queries can hurt the status of your overall report, as they can indicate that you have sought out financing with multiple banks but have been unable to secure a loan. This can make your new lender weary of approving a loan, since it indicates a reluctance by other organizations to let you borrow money.
Why are credit reports used?
Credit reports are usually required by lenders when an applicant applies for a loan or line of credit. These submissions provide the background creditors need to determine the parameters of a loan or whether one can be granted at all.
Banks will set standards for eligibility based on the contents of a credit report, such as minimum credit scores and previous debt management.
Information in a credit report also helps lenders determine an appropriate mortgage interest rate. Lenders will view borrowers with a good history of handling debt as a safer investment and set lower interest rates for those lines of credit. Credit reports that reveal irregular previous payments and mismanaged finances will be set with higher interest rates as a result.
Credit report vs credit score
Credit reports provide a heavily detailed history of someone’s financial journey, indicating every line of credit and loan application taken out in recent years. The contents of these multifaceted reports can be represented by a credit score.
Credit scores provide a summation of all the information included in the credit report. Usually included as part of the report itself, credit scores are always expressed as a number, usually ranging from 580 to 850.
Each lender will have their own parameters for acceptable credit scores, but any score above 680 is typically considered good, with exceptional scores starting around 800.
Borrowers with a credit score below 670 might have some trouble getting approved for a loan. However, the extensive details in the credit report will reveal why the score saw a dip, and could sway the lender’s decision in the borrowers favor, depending on the specific circumstances.
When to get a credit report
Your personal credit report is accessible via the three national credit bureaus at AnnualCreditReport.com. You can pull this report for free every 12 months to keep an eye out for any irregularities.
A good time to check your credit report would be a few months before you submit an application for a new line of financing, like a mortgage or car loan. This way you can ensure that the information included on the report is consistent with your personal financial records and begin the application process with confidence.
The information on a credit report is critical to determining whether someone is eligible for a mortgage loan.
An individual’s history of repaying debts, public records and other account information all weigh on how creditors determine the conditions of a loan and whether a mortgage can be approved. Before applying for a loan, be sure to review any steps that can improve your credit report and provide the perfect credit score to buy a home.