CoreLogic recently reported that mortgage credit risk slightly edged up during the first quarter of 2017. Whether it’s a home loan, a business loan, a car loan or whatever loan you plan to get, you can’t escape the test of creditworthiness. It’s set up by the lenders who’d like to see how qualified you are to receive funding for your endeavors. As the future of your financing is at stake, it’s only right that you make yourself creditworthy.
Credit Risk Factors
CoreLogic’s Housing Credit Index measures six borrower credit risk attributes in mortgage originations. These are credit score, debt-to-income ratio, loan-to-value ratio, condo/co-op share in home purchase transactions, and investor-owned homes. Overall, 1Q17 HCI rose by 3.6 points to 105.6 and was nearly at par with the average credit risk measured in 2001 to 2003 of 105.9.
Each borrower represents some form of risk to the lender who will decide if it’s worthy to lend to that borrower. To help the lender measure creditworthiness, it will evaluate the borrower’s capital, capacity, collateral, conditions, and credit history or better known as the 5 C’s of credit.
Capital refers to your assets that will help you repay your loan in case something bad happens to you financially. Capacity, on the other hand, will focus on your ability to repay your debt per se using your debt-to-income ratio as gauge. This DTI measures how much of your monthly gross income goes to your existing expenses and if it can support another form of debt adequately. As to collateral, this represents the asset that secures the loan, a car for an auto loan or a home for a mortgage and can be seized by the lender if you did not pay your debt.
Credit history is your credit report and score together. A lot of information can be mined in your credit report such as your personal information, name and address; your credit accounts and their opening dates, payment history and account balance; credit inquiries which show lenders how often you’ve applied for credit for the last two years; and more importantly, any debts in collections, bankruptcy, foreclosure, and public records that may not be reported starting July.
Improve Your Creditworthiness
1. Before you approach a lender for a loan, check your credit report first. Under federal law, you are entitled to get it for free at www.annualcreditreport.com. Inspect your report as early as now and as often (i) to ensure it contains accurate and up-to-date information, (ii) if there are any errors, to spot them and file a dispute, and (iii) to check for any signs of identity theft.
2. Always pay your bills on time and every time. When your account becomes 30 days or more past due, it will be marked as delinquent, could land in collections and will take some seven years before the record gets removed from your report.
3. Keep your credit card lines open but don’t max out your credit limit. Credit scores calculated by FICO and Vantage take into account credit utilization. This is the ratio of your outstanding credit card debt relative to your available credit limit. Say your total available limit is $10,000 and your total credit card debt is $3,000 so your credit utilization rate is 30%. Thirty percent or below is considered a good credit utilization rate.
4. Too much debt can kill you. Opening a new line of credit can positively affect your credit score as it will add to your existing trade lines and diversify your credit mix. But taking on too many debts in a short span of time will result in numerous credit inquiries and a debt burden that may be too heavy to carry later on. Borrow prudently, keeping your debt at manageable levels will result in a lower DTI ratio, too.
5. Save, save, save. The lender will likely ask for your bank statements. Your savings and other investment accounts speak of stability and reliability, as well as discipline, something that you can apply when you start paying your loan with the lender. These holdings can also help you afford a bigger down payment as the loan requires.
These are just some ways to improve your creditworthiness. Talk to a lender today and find out your eligibility for a loan.»