Credit Report and Score Analysis
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Questions and Answers

What factor does NOT contribute positively to a credit score?

  • A long credit history with positive accounts
  • Having a mix of credit types
  • Timely payment history
  • Too many new accounts and credit inquiries (correct)
  • How does a higher credit score affect the borrower's probability of default?

  • It has no effect on the probability of default.
  • It increases the probability of default.
  • It decreases the probability of default. (correct)
  • It makes the credit score irrelevant.
  • Which of the following is included in the credit report?

  • Personal net worth
  • Personal identification information (correct)
  • Annual income levels
  • Future employment history
  • Which one of these factors tends to lower a credit score?

    <p>High balances compared to credit limits</p> Signup and view all the answers

    What role does the Credit Score play in the qualification process for loans?

    <p>It helps determine the cost of the loan and PMI.</p> Signup and view all the answers

    Which factors should a borrower disclose during the qualification process?

    <p>Pending lawsuits and hidden debts</p> Signup and view all the answers

    What does the housing expense ratio include when calculating the borrower’s qualifications?

    <p>Total housing costs including property taxes and insurance</p> Signup and view all the answers

    Why might previous bankruptcies affect loan eligibility?

    <p>They can affect specific loan programs and underwriting criteria</p> Signup and view all the answers

    What is the upper limit for the total debt ratio acceptable at consummation?

    <p>50%</p> Signup and view all the answers

    Which of the following is NOT a regular obligation considered in the total debt ratio calculation?

    <p>Monthly grocery costs</p> Signup and view all the answers

    What is the key reason for including judgments and pending lawsuits in the qualification assessment?

    <p>To evaluate the risk they pose to repayment capacity</p> Signup and view all the answers

    What typically constitutes the total monthly debt in the total debt ratio calculation?

    <p>All debt obligations including mortgages and personal loans</p> Signup and view all the answers

    Which ratio is considered more critical in the qualification process?

    <p>Total debt ratio</p> Signup and view all the answers

    Study Notes

    Credit Report and Qualification Analysis

    • Liabilities on a borrower's credit report transfer to loan applications.
    • Lenders analyze unpaid balances, repayment terms, and payment history for each liability.
    • Credit reports include personal information, credit score, credit type, payment history (open and closed accounts, collections), inquiries, and public records (bankruptcies).

    Credit Score

    • Credit score is a predictive tool assessing default probability.
    • Higher scores indicate lower default risk.
    • Scores reflect future default potential, not past behavior.
    • Key factors affecting credit score include payment history, amounts owed, credit history length, credit mix, new accounts, and credit inquiries. Poor payment history, high debt load, and recent new accounts negatively affect the score.

    Additional Liability Considerations

    • Information not on credit reports, such as past foreclosures, bankruptcies, judgments, delinquencies on federal debt, pending lawsuits, or undisclosed co-signer obligations, are crucial.
    • Co-signer or guarantor obligations might need consideration, especially when recent payments or new obligations are involved.
    • Federal debt delinquency renders some programs ineligible.
    • Previous bankruptcies/foreclosures impact eligibility and underwriting.
    • Judgments & pending lawsuits influence creditworthiness.

    Qualifying Ratios

    • Qualifying ratios (lending ratios/debt-to-income ratios) determine borrower qualifications.
    • Housing expense ratio: Projected total monthly housing expense (PITI) divided by gross monthly income (expressed as a percentage).
      • PITI use depends on loan type (primary residence, second home, investment).
      • Includes property taxes and insurance, even if not automatically escrowed.
    • Total debt ratio: Total monthly debt (housing expense + other debts) divided by gross monthly income (expressed as a percentage). Accounts include recurring debts:
      • Revolving charges
      • Installment loans (>10 payments remaining)
      • Equipment, auto, or other lease payments
      • Mortgages/credit lines on other real estate
      • Alimony, child support, separate maintenance
      • Other recurring debt

    Ratio Guidelines and Considerations

    • Total debt ratio is more crucial than the housing expense ratio.
    • Ratio limits vary by program; AUS evaluates ratios as part of comprehensive analysis, not rigid rules.
    • Total debt ratio generally shouldn't exceed 50% at loan approval.

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    Description

    Test your knowledge on credit reports and scores with this quiz. Understand how liabilities, payment history, and credit inquiries impact creditworthiness. Learn about the critical factors influencing credit scores and the implications for loan applications.

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