Information on Your Credit Report That a Mortgage Lender Ignores
By Doug Goelz, Mortgage Services
You may think that your credit report is an immutable record of credit balances, monthly payments, and derogatory items (such as collections, short sales, and bankruptcies) that lenders use when underwriting a loan. All this information is used in calculating your credit scores, yet lenders will ignore or adjust some of the information on the credit report when evaluating your loan. Here is how mortgage lenders look at some key items on your credit report:
Credit Scores: Most credit reports show 3 credit scores (calculated by 3 different algorithms used by Experian, Transunion, and Equifax credit agencies). Mortgage lenders use the middle score (NOT the average) of the 3 scores. Your lowest and highest middle scores are ignored.
Student Loans: Even if a student loan is in deferment, and the credit report shows a monthly payment of $0, lenders will assign a monthly payment to the obligation. If a borrower can’t provide documentation showing what the payment on the student loan will be in the future, lenders use 1% of the outstanding balance as the monthly payment when calculating debt-to-income (DTI) ratios.*
Co-Signed Loans: If you have co-signed a revolving loan(such as a car loan or student loan), the balance and monthly payments (and any missed payments) show on your credit report. If you can show that the main borrower (the person for whom you co-signed) has made the payments for the past 12 months, lenders generally will NOT include the monthly payment in your DTI ratio. You generally will have to provide cancelled checks for payments made over the last 12 months to prove that someone else has been making the payments on the loan.
With a co-signed loan, remember that if the main borrower has had any late payments, the late payments will show on your credit report and will bring down your credit scores.
Lenders treat payments on co-signed mortgages that appear on your credit report differently from payments on revolving loans. If you are a co-signer on a mortgage, you probably also are on the title of the property. If you are on title of the property, lenders generally will include the mortgage payment in your DTI calculations even if you can prove that someone else has been making the payments.
Car Loans That Are Almost Paid Off: The monthly payment on a car loan shows on your credit report until the final payment is made. However, if the car loan has 10 or less payments remaining, the mortgage lenders will ignore the monthly payment and not include it in your DTI ratio.
Car Lease Payments: Lenders look at car lease payments differentlyfrom car loan payments. Your car lease payments will show on your credit report. Even if you have less than 10 lease payments remaining, a mortgage lender will include them in your DTI ratio.
American Express Payments: The entire balance on many American Express cards is due each month. If you have an American Express card and the balance has to be paid off each month, the monthly payment showing on your credit report (that it, the entire balance) is NOT included by mortgage lenders in your DTI ratio.
Incorrect Balances and Monthly Payments: If the balances and/or payments for obligations appearing on your credit report are not correct (e.g., because you have recently paid off the balance), your credit report can be updated immediately (with required documentation) to show the correct balance and payment which the mortgage lender will then use.
Your credit report is a critical piece of your mortgage application. Whenever you apply for a mortgage or are getting pre-approved for a mortgage before you buy a home, it is important that the mortgage originator with whom you are working understand your credit report and how the information on it will be interpreted by an underwriter. That way, your loan process will be easier and have fewer surprises.
* DTIs are critical in determining how large a loan a borrower can get. In general, your DTI =
(total monthly payments on your credit report + mortgage payment + property taxes + homeowners insurance) / gross monthly income.
The larger the monthly payments included in the DTI, the smaller the loan a mortgage lender will allow.
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