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When you’re looking for a new mortgage like many lenders, Champion Mortgage®
evaluates your credit based on the "Three C's."
Credit
Is it likely that you will repay the loan? Are your
payments on time and up-to-date? Are you financially stable and reliable?
Capacity
Are you able to pay the loan? What kind of outstanding personal debt do you have? Do you have enough earning power and net worth to repay a mortgage or home equity line of credit?
Collateral
Do you own something of value that can be promised
to the lender if you don't repay the loan? If you have less than perfect
credit, collateral may assist your loan request.
There are a few more factors
mortgage lenders look into when evaluating your capability of obtaining
a loan. To confirm your responsibility and stability they may examine:
- Your monthly income
- Occupation and length of time with employer (two
or more years is ideal)
- Homeownership status and history
- How often you move or have moved; patterns of
behavior and the timing of that behavior
And there are other examples such as, if you had a
charge-off (when the creditor sells your debt to a collection agency) in
your credit file from several years ago and you've been able to maintain
your credit over the years, you will be judged differently from someone
who recently had a charge-off.
But whatever the case, it's imperative to get off on the right foot when
building your good credit history. It is important to establish good credit behavior
as early as you can in order to build a solid credit reputation. See our Cleaning up Bad Credit section for some additional helpful tips regarding good and bad credit.
Essentially, credit bureaus will look for five main characteristics when
determining how high your credit score will be.
In descending order, they are:
- Past delinquency. If you have failed to make payments in the past,
lenders fear you will repeat that behavior based on your bad credit history.
- How your credit has been used. Have you maxed out or spent close to
the limit on a credit card? If so, then you may be considered a greater
risk than someone who is more conservative with his or her credit line.
Do you pay off your bill every month or a keep a revolving balance?
- How long you’ve established your credit history. The scoring models can judge each individual separately. Credit reporting agencies may take into account the duration of a person’s credit history.
- Frequency of credit inquiries. It is recommended that
you check your credit once a year to see if you have a good or bad credit
rating. Creditors requesting reports several times in a short period
may send a signal that you are applying for a lot of credit due to financial
difficulties, or that you are taking on too much debt and overextending
yourself.
- Your credit variety. It is best to have a mix of installment
and revolving loans (e.g., auto, credit cards, retail, etc). On installment
loans, a person borrows money once and makes fixed payments until the
balance is gone, while revolving borrowers make regular payments, each
of which frees up more money to access.
It is important to understand all the factors that determine if you have good or bad credit. It is never too early to begin building a good credit history and avoid bad credit inconveniences in the lending process.
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