The 5 C’s of Mortgage Underwriting – Credit

Thoughts of obtaining a mortgage almost immediately turn into thoughts about credit. Credit has been deemed an indicator of financial character under the premise that the likelihood of future performance can be informed by reviewing past performance. Much attention is paid to credit scores, but the evaluation of credit in the mortgage decision goes beyond just the scores.


Credit scores are calculated based on the account information contained in the report. While most mortgage programs and lenders have minimum score requirements, a credit report that meets that score requirement may not be acceptable if there is significant derogatory information contained in the report. Derogatory information includes late payments, collections, judgments, liens, bankruptcies, and foreclosures, to name a few of the more common examples.

While creditors may charge a late fee immediately when a payment is late or a few days after, a late payment does not appear on your report unless the payment is more than 30 days late. In fact, the report shows late payments at 30, 60, 90, and 120 or more day increments. Many loan programs will allow a couple of late payments in the last 12 or 24 months, but late recent late payments often hit scores hard, which may make it difficult to meet the minimum score requirement.

Collections, judgments, and liens impact credit scores through their date-of-last-activity. This is important because it creates a situation in which paying a collection could actually reduce your credit score. Credit scores are calculated based on activity within 24 months. Collections often have no activity after they are reported until they are paid off. So if you pay toward a collection that was reported three years ago, the new date-of-last-activity will bring the collection back into the 24-month window and hit your credit scores.

Judgments and liens are treated similarly. If you are planning on buying a home in the near future, do not pay off anything without speaking to your Loan Officer first. It is not a given that paying them off will be a condition of obtaining loan approval. While it is still a good idea to pay them and get them off your report eventually, it may be an option to wait until after your purchase.

Bankruptcies and foreclosures are, of course, major derogatory events. Most loan programs are going to require significant waiting periods and several new credit accounts in good standing to reestablish an acceptable credit history.

Credit plays a significant role in determining whether or not you qualify for a mortgage but the evaluation goes beyond scores. It is not uncommon for people to think that, because they have had a blemish or two over the last several years, they will not qualify for a loan. Don’t let assumptions keep you from becoming a homeowner. The best way to know if you can qualify is to contact me at your convenience. I am always available to help you achieve your goals.

Look for the companion articles to this one on my blog:

The 5 C’s of Mortgage Underwriting – Capacity

The 5 C’s of Mortgage Underwriting – Capital

The 5 C’s of Mortgage Underwriting – Collateral

The 5 C’s of Mortgage Underwriting – Compensating Factors