What's on your Credit Report?

What banks look for on your credit report

A few years ago, your credit score was the most important item found on a credit report.  (Sounds redundant, but it’s not.  Most people are unaware that your credit report contains a myriad of information on you.  Where you’ve worked for the last 20 years, what debts you have, any liens, maiden names, defaults, foreclosures, bankruptcies, even divorce)  Because of the change in the economy, and change in underwriting guidelines, the banks are now more focused on your debt to income ratio.  In fact, with the introduction of HARP 2.0, it’s almost the only thing they’re focused on.

What’s a debt to income ratio?  Simply put, it’s a measure of your income vs. your liabilities.  This ratio tells the banks underwriters how much discretionable income you have left over (after paying all of your bills), and tells them if you can truly afford to make another payment on that which you’re trying to get a loan.  So if (say) you were making $1,000 a month, and your total liabilites were $600/month, then your Debt to Income ratio (D.T.I) would be about 60%.  While the discussion on D.T.I. can be quite extensive, just keep in mind that the less money you’re paying out to creditors, the better your chances for qualifying for a loan.

 

How does this apply to you?  You can improve your DTI one of three ways. Either pay down current debt, don’t accumulate debt, or Increase your income.

What about credit score?  If two individuals are applying for a loan, and client A has an 800 Credit Score with a 65% DTI, and client B has a 620 Credit Score, but has a 40% DTI, banks will approve client B over client A due to his DTI.  In this, we can see that credit score is almost irrelevant, when viewed with the overlay of a DTI.  Banks no longer offer “stated” loans.  They are looking for individuals that can show a good cash flow.