Training Day 3: Understanding Consumer Credit and Its Role in Mortgage Lending
Introduction
Welcome to Training Day 3 of the Boots 2 Loans program. Today, we will focus on understanding consumer credit and its role in mortgage lending. We will explore the history of credit, different credit scoring methods, factors impacting credit scores, and basic credit repair strategies.
Consumer Credit: The History of Credit
Consumer credit refers to the borrowing of funds by individuals for personal or household purposes. The history of credit dates back to ancient civilizations, where credit was mainly used as a means of trade or for agricultural loans. Over time, the credit system has evolved, becoming a key component of modern financial systems and essential for obtaining mortgage loans.
What is Credit?
Credit is the trust that allows one party to provide resources (money, goods, or services) to another party with the expectation of repayment at a later date, often with interest. Credit scores and credit reports are tools used by lenders to assess an individual’s creditworthiness, helping them determine the likelihood of a borrower repaying a loan.
The Different Credit Scoring Methods
FICO Score: The most widely used credit scoring method, developed by the Fair Isaac Corporation. FICO scores range from 300 to 850, with higher scores indicating better creditworthiness.
VantageScore: A credit scoring model developed by the three major credit bureaus (Equifax, Experian, and TransUnion) to compete with FICO. VantageScore ranges from 300 to 850, similar to the FICO score.
Other credit scoring models: Some lenders may use their proprietary credit scoring models or alternative models that consider non-traditional credit factors, such as rental history or utility payments.
What Impacts Credit Scores
Several factors contribute to an individual’s credit score, including:
Payment history: The timeliness of payments on credit accounts, including loans and credit cards.
Credit utilization: The percentage of available credit being used on revolving credit accounts, such as credit cards.
Length of credit history: The age of the oldest credit account and the average age of all accounts.
Types of credit: The mix of credit accounts, including revolving accounts and installment loans.
New credit inquiries: The number of hard inquiries for new credit made within a certain period.
Credit Repair 101
Improving your credit score is essential for obtaining favorable mortgage terms. Some basic credit repair strategies include:
Check your credit reports: Obtain your free annual credit reports from the three major credit bureaus and check for errors or inaccuracies that may be hurting your score.
Pay bills on time: Establish a history of timely payments to demonstrate responsible credit management.
Reduce credit utilization: Keep credit card balances low, and aim to use no more than 30% of your available credit.
Diversify your credit mix: A diverse credit portfolio can improve your score, but only open new accounts if necessary and you can manage them responsibly.
Limit hard inquiries: Avoid applying for new credit too frequently, as this can negatively impact your score.
Conclusion
Understanding consumer credit is crucial for success in the mortgage lending industry. As a Relationship Lender, you will need to be knowledgeable about credit factors and scoring methods to help your clients navigate the mortgage application process effectively. The information provided in today’s training will serve as a foundation for guiding your clients towards achieving their homeownership goals.
