So I speak with buyers on a daily basis, and the vast majority wants to know how the so called “Credit Crunch” will affect them when it comes to buying a home. Have underwriting guidelines gotten tougher, is there really any money available for buyers with less than perfect credit, or heck what if I have no credit established? Alas, here is some information that you may find helpful.
Most major lenders pull a tri merge credit report for a borrower. A representative credit score is a statistically based rating that assesses the likely future performance on a loan or other credit obligation. Scores tell us how likely customers are to pay debts as agreed and use credit wisely. They assess how well a customer will probably manage credit in the future.
A minimum of two credit bureau scores must be obtained in order to determine the “representative” credit score for each applicant.
When there is more than one applicant on a loan, each applicant’s “representative” credit score will be used to determine a “representative” credit score for the loan. This score will be used when underwriting loans within any recommended credit score requirements based on the product selected and the lender.
Particular mortgage products have minimum credit score guidelines, which vary lender to lender.
So what happens when I have no credit established? Many first time homebuyers have a limited credit history which leads lenders to seek alternative financing, such as FHA loans. The lender asks the buyer to provide a Non-Traditional Credit History. A credit profile must be established for all customers whose income is being used to qualify. When reviewing loans with non-traditional credit, the rest of the loan must meet standard underwriting guidelines.
Customers may provide three to four non-traditional credit references. Each credit reference must reflect a satisfactory payment history for the previous 12 months. The customer can provide a written reference from the creditor (which must be on the creditor’s company letterhead) or provide copies of cancelled checks (front and back) for the previous 12 months. Some examples of non-traditional credit references are rental payments, utility bills (gas, electric, telephone, cable, etc.), insurance premiums (health, auto, life), medical bills, or payments for child care and school tuition.
There you have it, some information as to how credit scores are used to gauge repayment, and what information you may need to be prepared to build your credit in order to purchase down the road.