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Banks turning to mortgage BPO services to address market challenges: Effective internal delivery grows more difficult as market conditions continue to deteriorate

National Mortgage Professional
Feb 16, 2007

Will good credit guarantee a loan?Annie Changcredit rating, loan approval Yes - more than likely, good credit will guarantee a loan if you are getting a residential loan. However, if you are getting a commercial loan, other measures are considered. On a commercial project, creditworthiness is not the most important factor when lending institutions decide whether to issue a letter of interest (a letter of interest in a commercial loan is similar to an approval letter in a residential loan). For a commercial loan, property income is the primary concern with the net worth of applicants next and the final concern is the credit score. The best way to guarantee a commercial loan is to show lenders what they love to see. Show them 10-20 percent excess income generated from the subject property after mortgage payments and property-associated expenses have been paid. Next, lenders evaluate an applicant's net worth. When an applicant has sufficient net worth, he can weather unexpected events. This is like financial insurance to the lender. The final factor is the credit score. Although it's not as important as income generation or net worth, a strong credit score can turn difficult transactions into successful transactions. Furthermore, strong credit scores can even allow access to a greater number of funding sources and options. Credit scores are determined by the three credit bureaus: TransUnion, Equifax and Experian. Credit scores range from 350-850; the higher the score, the better the credit. For residential loans, usually a single underwriter reviews the loan following a standard procedure of checking off specific lists or guidelines. With commercial loans, the process is not as defined and guidelines are not as specific. Rather than a single underwriter, a loan committee evaluates all information associated with the project and applicant before making a decision on issuing a letter of interest. For commercial loans, there are not many quick-fix tips to increase the property income or personal net worth; however, your credit score is dynamic and flexible, and can be mastered with a few simple strategies. The key components affecting your score are your payment history (35 percent), amount owed (30 percent), length of credit (15 percent), new credit (10 percent) and credit types (10 percent). Following a few guidelines can maximize and even improve your credit scores: - Keep balances below 50 percent (33 percent recommended). To evaluate credit scores, credit bureaus total the credit used monthly. Credit bureaus add up all the credit limits, and the credit score is determined by the percentage of use each month. - Don't close unused credit cards with good histories. Since credit bureaus add all credit limits to determine how much credit one uses on a monthly basis, keeping some unused cards with good histories can be helpful. They will keep the total percentage used on all credit cards lower. Keep a manageable number of credit cards. Typically, a person can manage three to five credit cards. - Don't open new credit you won't use. Although credit bureaus total all the credit limits to see how much credit you use on a monthly basis, opening a new credit card will negatively affect credit in two ways: short length of history (15 percent of overall score) and new credit (10 percent of overall score) don't help the credit score. Often we are tempted by a credit card with a zero percent introductory rate or 10 percent off from the first purchase in the department store. If we take the offer, the credit history is short and it's a new credit. Credit bureaus like to see stability in a person's borrowing habits. - Maxing out credit each month - even if paid in full - can lower your score. If the credit limit is maxed out (30 percent of the overall score) then the credit score will be lower, even if you pay the full balance each month. Also, credit bureaus have information about whether or not a payment has been received on time, so be sure to make payments on time. - Rate shopping with multiple credit inquiries within 14 days can lower your score from two to six points from each inquiry. Many clients like to shop interest rates when purchasing or refinancing a home or business. Multiple inquiries from different mortgage brokers or lenders can lower the credit scores from two to six points for each inquiry. As a result, the interest rates may not be better during the shopping process. - Collections stay on the credit report for seven years. Try to resolve credit problems before they are reported as collections. Most lenders will require you to resolve large collections before granting you a loan. If there are collections or charge-offs on your report, the charges or collections will stay on the credit report for seven years, regardless of whether they have been paid off or not. Following these guidelines will allow you to manage your credit for maximum benefits. As mentioned above, a great asset of commercial loans is that the loan committee can be very flexible when approving a loan. The committee balances the three components of a loan. The compensating factors can be the property income or net worth if the credit score is less than perfect. Vice versa, if the credit scores are good, the income and net worth can be less satisfactory. Sometimes a letter of explanation for a so-so credit score may be able to influence the loan decision. Working with an experienced business loan specialist who can illustrate the benefits of funding the project to the lending institutions is a worthwhile investment. Will a good credit score guarantee a commercial loan? The answer is no, not on its own. It will be considered with several factors in the overall package. And, although it may not be enough to carry a loan on credit score alone, a good credit score can certainly be very helpful. Annie Chang is a senior loan officer of commercial, residential and commercial loans with Prime Share Pacific Mortgage, a full service brokerage firm in Castro Valley, Calif. She can be reached at (925) 216-3618, e-mail annie@changteam.com or visit www.changteam.com.
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