Credit Scores and Credit History in Mortgage Lending

Your credit score is derived from your credit history. However, when it comes to lending decisions, the two are not always interlinked.

Usually, the first thing a lender looks at in a credit report is your credit score. They will examine your credit report, including scores, from all three of the major credit reporting bureaus. Lenders will usually approve or deny you based on the middle of these three scores.

What happens if you're filing a joint application? In that case, lenders will look at each middle score for you and your co-applicant. Then, they take the lower of the two middle scores to base a lending decision against.

If your score is high enough, mortgage lenders will take a cursory glance at the rest of your report. If there aren't any major delinquencies, such as a bankruptcy, foreclosure, or judgment, then the chances of approval are good. A high-enough score is usually above 620. When you get into the 700-score range, you'll get even more preferential treatment.

But what happens if your score isn't high enough? At this point, a mortgage lender will closely examine each of your open accounts to establish an overall credit pattern. For example, if you had been late on your credit card payments 2 years ago, but have since paid them perfectly, it is regarded as favorable. If you have had perfect credit in the past but have been delinquent on your payments recently, you will need a perfect explanation to overcome that hurdle.

To take advantage of this behavior, you'll need some patience and diligence. Lenders will usually weigh the past 12 months of your credit the most. If they see 12 consecutive months of perfect payments for all your accounts, they will tend to overlook some of your previous delinquencies. They might also overlook your middle credit score if it's lower than 620. Of all the accounts they examine, they will examine your mortgage payment history with a microscope. When it comes to your mortgage payment history, they look at the last 24-36 months, not just the last 12.

Of course, if you have something major like a bankruptcy or foreclosure, you have more explaining to do.

Obtain a copy of your credit report from all three major credit bureaus. Make sure it contains your scores as well. Look over each of your accounts. Even if you know you've been late on a payment within the past year, it's not always reported that way on your credit report.

If all of your accounts have perfect payment history over the last 12 consecutive months, you're in very good shape. If you are showing as delinquent on any account, start your 12 month count from that point. For example, if you pull your credit report in July, and your last delinquent payment was in April, then you will start counting 12 months from May (assuming your May payment brought the account current). By the following May, if you've paid everything on time, you'll have a much better shot at approval.

If you need to obtain a mortgage now, you can usually secure an approval from a subprime lender. Sometimes, they are your only option. If you find yourself in this situation, you must resolve to pay every single account perfectly. After 12 months of doing so, you should be able to refinance with a conventional lender at a better interest rate. Some subprime lenders have sister companies that will make refinancing easier. These sister companies will usually have more lenient guidelines for current customers of the subprime lender. When applying to a subprime mortgage company, see if they have affiliated companies that offer this service.

Of course, the best way to secure a good mortgage without having to do the 12-month dance is to have the highest possible credit score. Again, make sure you obtain a copy of your credit reports with scores. Then, find a good book on how to raise your credit score and follow the guidelines. You might not have to wait 12 months after all.