What lenders look for
When you're looking for a new mortgage or a home equity line of credit, like many lenders, Mid America Funding, Inc 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 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? There are a few more factors mortgage lenders look into when evaluating your capability to obtain 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
There are other factors, such as, if you had a previous 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.
Whatever the case, it's imperative to get off on the right foot when developing credit. It is important to establish good credit behavior as early as you can in order to build a solid credit reputation. See Building Good Credit for some helpful tips.
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.
- 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?
- Your age. The scoring models can judge each individual separately. Thus a 20-year-old's credit history would not be compared to a 45-year-old's credit history.
- Frequency of credit inquiries. It is recommended that you check your credit once a year. 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.