More on Qualifying the Borrower

We've attached a new resource here that uses slightly different terminology, like "inquiries" instead of _______________________. Keep in mind that each credit bureau may use its own vocabulary to describe these factors, so it's important to read details in descriptions to recognize the variations when you see them.

"new credit"

What is the formula for calculating the total debt ratio?

(Monthly debt payments ÷ gross monthly income) × 100

Although the credit reports from each of the major reporting agencies may vary, you can expect to find the same type of information. Which of these items can be found on our sample credit report?

-Accounts in good standing -Contact information for the credit reporting company -Credit history inquiries -Personal information -Potentially negative items

Some items on a credit report may be viewed negatively by a lender. Which of these items would you expect to find in this section of the report?

-Loan with a past due balance -Bankruptcies -Liens -Court judgments -Accounts sent to collections

Sort the factors based on their importance to a credit score, from most important (first) to least (last). We've attached a new resource here that uses slightly different terminology, like "inquiries" instead of "new credit". Keep in mind that each credit bureau may use its own vocabulary to describe these factors, so it's important to read details in descriptions to recognize the variations when you see them. These factors may have either a positive or negative effect on the consumer's credit score

1st- Payment history 2nd- Credit utilization 3rd- Length of credit history 4th- New credit and types of credit

Credit scores range between

300 and 850

Credit Score Factors Five factors are used to determine a FICO® credit score. What are they? These factors aren't weighted equally. Some factor in more heavily than others.

Age of accounts Credit usage Inquiries Payment history Types of accounts

What's included in a total debt ratio? AKA debt to income ratio Total obligation Back-end ratio

All recurring (or installment) debt that will last longer than 10 months, such as monthly mortgage, car, credit, and loan payments.

What is a loan-to-value ratio?

Amount being borrowed compared to the value of a property (either the appraised value or sales price, whichever is less)

How do you calculate LTV?

Amount financed divided by property value multiplied by 100

Consumers should pay particularly close attention to the (items on a credit report may be viewed negatively) section and take care of items showing here. They should also make sure this information is accurate because it could cause a lender to turn down a loan.

Consumers can dispute the information they believe is incorrect

Housing and Total Debt Ratios Ratio may vary depending on borrower's credit score and loan type

Conventional loans Fannie Mae Conforming Loans Freddie Mac Conforming Loans FHA Loans VA Loans

What Helps Determine a Credit Score? Credit scores are calculated using information from which of these items?

Credit report

The most common credit score is the

Fair, Isaac, and Company (FICO®) score.

What is a loan origination fee?

Fees charges by a lender for processing or originating a loan

Income may come from a variety of sources, some viewed more favorably than others. Which of these are sources of income a lender might consider?

If an applicant is receiving any of these types of income, they may be considered, provided they have been received for a period of time and are expected to continue. -Alimony -Bonuses -Child support -Government entitlement funds -Normal wages or earnings -Pensions Bonuses and overtime will be considered if they've been received regularly. Earnings from a second job may also be considered if that employment has occurred for two years and is expected to continue. So, if an applicant picked up a seasonal job for a couple of months to help save some money to buy a new home, that income wouldn't be considered.

Payment history, age of accounts, credit usage rate, and inquiries are factors considered in calculating a credit score. Which of the following is also considered?

Length of credit history

How do you calculate a loan origioniation fee?

Loan amount x origination rate (divide a percentage by 100 to obtain the rate, so an origination fee of 2% is the same as 0.02)

Which of the following factors carries the heaviest weight when calculating a credit score?

Payment history

Listed here are different activities. Based on what you've learned about credit scores so far, would these actions have a positive or negative effect on the score?

Positive effect on credit score: -Lengthy credit history -On-time payment history -credit accounts with low or no balances Negative affect on credit score: -Missed payments -Short credit history -Maxed-out credit accounts

How do you calculate the housing ratio?

Principal + Interest + Taxes + Insurance + association fees divided by monthly gross income multiplied by 100

The best lending rates go to borrowers with excellent credit (above 740)

Scores below 669 are considered subprime borrowers

Self-employed individuals should plan ahead if thinking about purchasing a home. While deducting expenses may prove beneficial for their taxes, this may reduce income to the point of losing out on a loan. .

Talking with a mortgage professional or an accountant well in advance may help the consumer understand the right steps toward loan approval

When an individual is self-employed, proving income and finances to a lender may take a little extra effort than for other individuals who are not self-employed. According to the resource, what additional documents may a self-employed individual need to provide when obtaining a loan? Select all that apply.

Tax returns IRS Form 4506-T Profit-and-loss statement

In order for earnings from a second or part-time job to be considered as part of a lender's income evaluation, what must be true?

The applicant must have been employed for at least two years, and the employment must be expected to continue.

Tina is applying for a home loan. In order for child support payments she receives to be considered in the income evaluation by her lender, what must be true?

There must be a consistent track record of payment or the payments must be the result of a court order.

Strategies for self-employed and commission-based employees trying to obtain financing includes

having extra cash reserves, adding steady employment to their income source, and deferring tax write-offs.

Remember, each major credit reporting agency may have a different format to its report, but they all collect the same type of information. Each report may contain slightly different data, however, because the reports only contain information reported by creditors and other sources, and at times, ______________. In case you'd like to see samples of the other agencies' reports, there are samples in your resources.

these sources do not report to all three agencies

While all three credit reporting agencies collect similar information, ____________;therefore, credit scoring may differ somewhat between the three agencies.

they're not identical

Lenders will compare a borrower's gross monthly income to total debt and housing expenses. Total debt should not exceed 36% of gross monthly income, and

total housing expenses should not exceed 28% of gross monthly income.

Credit Report Given the importance of credit on the ability to obtain financing, consumers should be knowledgeable about their credit score and report. To help with this, consumers can obtain one free credit report annually directly from each of these major credit reporting agencies

Experian Equifax TransUnion www.annualcreditreport.com.

What a Credit Score Tells a Lender Lenders use credit scores when determining whether to approve a loan application. What does the score tell the lender?

How likely the applicant is to repay the money that's been borrowed

Inquiries or requests for credit history generally come in two types: those you initiated and those you didn't initiate. Sort these items based on which category they likely fall into.

Initiated by You -Credit card application -Loan application -Insurance application Not Initiated by You -Credit monitoring -Pre-approved credit offer

PDF You've reviewed this The Accounts in Good Standing section lists accounts that may be viewed favorably by a lender. These are generally accounts without any late payments or that have been paid off or closed. What type of accounts may be listed here?

Installment accounts tend to be loans, such as an automobile loan or a mortgage. Revolving accounts tend to be credit cards or lines of credit (like a home equity line of credit).

What is included in the housing ratio (front-end ratio)

Monthly housing obligations, Principal Interest, Taxes, Insurance (PITI), homeowners or condo association fees

The personal information section includes either information you reported to the credit reporting agency, or information your creditors or other sources reported to the agency. What information can you find in this section?

Name and name variations Year of birth Employers Spouse or co-applicant name Address

Jim is self-employed. He and his wife want to obtain a home loan. Which of the following statements is true?

They'll need to provide additional proof of income.

(Monthly debt payments / gross monthly income) x 100 After the ratio is calculated, the lender checks to make sure it's within the lender's threshold.

Total debt ratio

Fannie Mae Conforming Loans

Total debt ratio: 36 - 45%* Housing ratio: 28%*

Conventional Loans

Total debt ratio: 36% Housing ratio: 28%

VA Loans

Total debt ratio: 41% Housing ratio: N/A

FHA Loans

Total debt ratio: 43% Housing ratio: 31%

Freddie Mac Conforming Loans

Total debt ratio: Up to 45%* Housing ratio: N/A

(Monthly housing expenses / gross monthly income) x 100 After the ratio is calculated, the lender checks to make sure it's within the lender's threshold.

Total housing ratio

How do you calculate total debt ratio?

Total of monthly debt obligations divided by monthly gross income multiplied by 100

Self-employed individuals ___________ may have trouble showing enough steady income to apply for a loan.

and those who work on commission

Items not initiated by you ______________________.

are not visible to the lender. Only you will see these.

Items initiated by you___________________________. A lot of inquiries may raise some red flags.

are visible to lenders viewing your credit report.

Items that have been paid off or are open and current may appear in the accounts in

good standing section of a credit report.

Higher credit scores mean

less risk of delinquency better rates and terms and a higher chance for loan approval

Items that can harm credit ratings when they appear on credit reports include

past due accounts, bankruptcies, liens, and foreclosures.

Lenders use borrower credit scores as one factor in determining loan qualification. Factors that determine credit score include

payment history, age of accounts, credit usage, inquiries, and types of accounts.

Income Evaluation Would you lend $1,000 to someone who promised to pay you back but had no job or source of income? Probably not, unless you were feeling charitable. Lenders aren't the charitable type. Lenders will only loan money when it's likely they will be repaid—_________________________. If a consumer doesn't have income, this makes it unlikely she can pay back the loan. Therefore, lenders will want to evaluate a borrower's income.

with interest