How Credit Reports Affect the Mortgage Loan Process in California

What is a credit report, exactly? And how can my credit reports affect me when applying for a mortgage loan to buy a home in California?

These are some of the most frequently asked questions California home buyers have about their credit reports. And today, we’re going to examine them in detail.

What Is a Credit Report?

A credit report is simply a record of your borrowing history that dates back several years. You have three of these reports, because there are three companies that collect, organize and sell this kind of information. They are TransUnion, Experian, and Equifax.

These three companies are also referred to as credit reporting agencies (CRAs) or “bureaus.” But don’t let the official-sounding terminology fool you. They are not associated with the government in any way. They’re publicly traded companies that make money by collecting consumer information and selling it to creditors.

So essentially, a credit report is a history of how a person has borrowed and repaid money in the past. It includes account and payment information relating to credit card usage, personal loans, mortgage loans, student loans and more. They also include derogatory information relating to bankruptcies, foreclosures, debt collections and late payments.

Now you can see why credit reports are so important to lenders. They show how a person has repaid his or her debts in the past. Obviously, this is something a bank or creditor would want to know about. They use this information to make informed lending decisions — which makes sense when you consider the size of the average mortgage loan in California.

How It Affects You When Applying for a Mortgage

Let’s move on to frequently asked question #2. How does my credit report affect me when buying a home in California, and when applying for a mortgage loan?

To answer this question, we have to talk about another piece of the “puzzle,” and that’s the credit score.

The information compiled within your reports is used to create a three-digit number that’s known as a credit score. The companies that create these scoring models use computerized programs to convert historical data into a usable score.

What does this have to do with buying a home in California? A lot.

If you’re going to use a mortgage loan to help finance your home purchase, your credit score matters. This three-digit number could determine whether or not you qualify for financing. It can also influence the interest rate you receive from a bank or mortgage lender.

But it all starts with your credit reports — the ones created by TransUnion, Experian, and Equifax. Banks, credit card companies, auto lenders, and mortgage companies usually report payment histories to the reporting agencies. That data is used to create the scores we just talked about. So it’s all connected.

If your credit report shows a history of timely payments, you’ll probably end up with a strong credit score. And that could help you (A) qualify for a mortgage loan and (B) secure a competitive interest rate.

You Can Check Them for Free

According to federal law, the three reporting bureaus mentioned earlier must give you one free credit report every 12 months. So why not take advantage of that?

You’ve probably seen offers for “free” reports all over the Internet. But there is only one official website regulated by the Federal Trade Commission, and that website is AnnualCreditReport.com. Through this site, you can request your free reports from all three bureaus.

The question is, do you really need to check them?

Some people go their whole lives without ever checking their credit reports. For instance, people who don’t use credit cards or loans have little use for this kind information. They don’t rely on banks and lenders, so they probably don’t want or need the information lenders use to qualify borrowers.

But the fact is most consumers rely on financing at some point in their lives. This might be a mortgage loan used to buy a house, a student loan used to pay for college tuition, or a credit card used for vacations or other large purchases. This is where the information in your reports becomes more important.

Bottom line: If you plan to buy a house in California in the near future, and need to use a mortgage loan to make it happen, you might want to review your credit reports for accuracy.

If you find any inaccurate or erroneous information within your file, you can dispute it through the company that produced that particular report.