Why Does a Mortgage Loan Require a Credit Report?

Three Credit Reports

Most mortgage loan programs, including FHA, VA, Fannie Mae and Freddie Mac, require a review of all three major credit bureaus--TransUnion, Equifax and Experian. All three credit reports are merged into one credit report called tri-merge report, which enables the lender to see all three credit bureaus' reports side by side. This ensures a debt that is only listed on one report is reviewed.

Each credit bureau creates a credit score for each person. Lenders review the credit scores when determining credit eligibility for different loan programs. Most mortgage lenders use the middle score of the three credit scores when qualifying you for a mortgage. For example, if your scores are 700, 685, and 690, the lender probably would use the 694 to determine qualification for your mortgage. The higher the credit score, the less risk there is of you defaulting on the mortgage. Consequently, the higher credit score is, the lower your interest rate could be.

Mortgage companies carefully review your mortgage payment history, as it is the best indicator of whether you will make your new mortgage payments on time. Homeowners with a history of late payments can expect higher interest rates and less favorable terms than people who consistently have made mortgage payments on time in the past. The rest of your credit can be perfect, but if you've been 30 days or 60 days or more late on your current mortgage, this can cause the mortgage company to decline your loan.

Federal law requires the credit bureaus to provide you a free copy of your credit report a least once a year. Obtain a free copy of your reports from the credit bureaus by visiting their websites, or call their toll free number. Knowing what your credit report states is important, because you can correct errors on your credit report before you submit your loan application. One item not revealed on the free credit report, however, is your credit score. Your credit scores are available only on a report obtained through a third-party credit bureau.