Home Financing Secrets Revealed
Part Three

"What the hell is this crap?" uttered Jim when looking at his credit report for the first time.

Charge-offs, inquiries, R1s -- what's it all mean? Here's how to understand this increasingly crucial report.

You really can understand your credit report's "secret code".

In e-lesson #2, we discussed your debt-to-income ratio and whether it complies with the Fannie Mae or the Freddie Mac benchmark ratio, i.e. 41%.

You pulled out your calculator and did a little math, reminding you of grade school as you crunched a few numbers.

Now you're ready for today's lesson on...credit reports.

Arrrggh!

No, it's really not that bad, once you decipher the code.

You really can do this, and I'm going to walk you through it. It's important and I don't want you leaving this critical piece of the puzzle in some other person's hands.

This is your dream home on the line. And here's credit report secret # one:

Lenders prefer "vanilla" home loan applicants!

Wow, big surpise.

Of course lenders want "vanilla" home loan applicants; they want to reduce risk.

Wait a minute, what's a "vanilla home loan applicant?"

Glad you asked.

A "vanilla home loan applicant" is a person whose report reflects (a history of) stability and responsibility or perhaps a history of good luck:

• History of taking on and responsibly managing debt;
• 3+ three "seasoned" trade lines, i.e. described as open and active credit lines;
• Regular on-time payment history;
• W-2 income with at least two years of same industry work experience, preferably more than two years;
• No more than 50% debt to available credit;
• Home owner, not a renter;
• 680+ FICO score

It's really common sense, isn't it?

However, here's what is not common sense: the career changer, who suddenly after 16 years of being a high school teacher and coach leaves the classroom and pursues his long-time passion: real estate. A lender may not see his credit worthiness in a report. Instead, the lender sees a person either strategically or foolishly pursuing a whim and not being able to re-pay his debt.

Red flag alert.

When a loan applicant's file even subtly drifts "off vanilla," lenders get nervous. When lenders get nervous, they respond with more "conditions," a higher interest rate, or, worse, a rejection.

You can expect your credit report to show this information for each credit account:

• Name of creditor
• The type of account
• Terms
• Amount of the original debt or credit limit
• Balance outstanding on the most recent report
• Whether payments were made late during the reporting period
• Credit reports are seldom complete. Some card issuers don’t report to credit bureaus out of respect for customers’ privacy. Many gas credit cards report only delinquent accounts.

Combined with the name of the creditor, type of account, terms, and whether payments are made on time is the "coding" credit bureaus use to intimidate us.

However, don't worry, we're getting to it.

Most credit grantors are primarily interested in the last 12- or 24-month reporting period.

In fact, many credit bureaus routinely delete older information from their files. However, a bankruptcy can stay on a credit record for up to 10 years and debts that a creditor writes off as "uncollectible" can remain for seven years.

When your credit file shows blemishes such as "Lates", "Collections", "Chargeoffs", etc, that negatively effects your chances of getting a loan, let alone a decent loan.

Of the three major credit bureaus (Experian, TransUnion, and Equifax), Experian provides a payment history written in plain English -- "never pays late," "typically pays 30 days late," etc. Other comments might include "internal collection," "charged-off" or "default."

Charged-off means the creditor has given up...thrown in the towel.

Other reports use payment codes ranging from 1 to 9; an R1 or I1 on a report is an indication of a good payment history on a revolving or installment account.

The next section is the part you want to be absolutely blank. If you have a public record on there, you've had a problem -- though this section doesn't list arrests and criminal activities; just financially related data, such as bankruptcies, judgments and tax liens.

The final section is the inquiries. That's a list of everyone who asked to see your credit report.

Any time anyone authorized to pull your credit actually pulls your credit, it will post an inquiry. If you call the credit bureau and ask for a copy, it will be on there.

Inquiries are divided into two sections. "Hard" inquiries are ones you initiate by filling out a credit application or buying a new car.

"Soft" inquiries, on the other hand, are from companies that want to send out promotional information to a pre-qualified group or current creditors who are monitoring your account.

The soft inquiries are only shown on reports given to consumers.

You may have heard that a large number of inquiries can have a negative impact on your credit score, but you're probably OK.

The vast majority of inquiries are ignored by the FICO scoring models.

For instance, the FICO scores have at least a 30-day "shopping" period where auto and mortgage inquiries are initially bypassed and not counted. It also counts two or more "hard" inquiries in the same 14-day period as just one inquiry.

You could have 30 in two weeks and it only counts as one.

Click here to view a sample credit report from Experian, as the report guides you through the less-confusing code of a credit bureau's report.

Feel better? With the right information, you really can take control of your home loan destiny.

Join us next time for e-lesson # 4 when we share how you can get a fr_ee copy of your credit report from each of the three major credit bureaus. And what's this you're hearing about various home loan programs such as "full-doc," "no-doc," and "stated"? In plain English, we'll translate in the next report.

Mike Payne, a Realtor with Horizon Realty and a licensed mortgage broker, specializes in providing Rent to own Florida Home || Florida Rent to Own Homes.

To read other FR*EE special reports about buying or selling a home, visit Rent to Own Florida | Florida Lease Options.