Last Updated on December 29, 2021 by rida
Before you apply for a loan, you need to understand your numbers. Lenders consider your credit score and several other factors to determine your eligibility and loan risk. They typically use loan origination software that automates the loan underwriting process and all other processes in loan origination. This software analyzes factors like your credit score and loan-to-income ratio to see if you can pay back the loan or not. Analyzing your credit report is a key step in this process. A lender looks for the following red flags in your credit report:
Table of Contents
A Lender Looks For Past Due
It has been more than 30 days after the due date and you have not made a payment. This is “past due” and it is not good for your loan application.
A Lender Looks For Late Payment and Delinquencies
A payment made 30, 60, 90 or 120 days after the due date is a late payment.
A Lender Looks For Taking on Someone’s Debt
When you co-sign another person’s loan, your credit report reflects late payments or no payments if another person does not make payments. It’s because you are also responsible for the loan.
A Lender Looks ForCollection Account
A collection account is created when the original collector turns to a collection agency.
A Lender Looks For Minimum Payment
It is not a good idea to make minimum payments on your credit card. Don’t repeat it multiple times. This indicates that you are going through financial troubles. You cannot afford paying the balance back. This is a big red flag.
Charge Off
This happens when the creditor is unable to collect payments and writes the balance off as a “tax credit”. It occurs when you have not made a payment for six months.
Repossession
Repossession occurs when a lender reclaims the collateral to recover the loan.
Foreclosure
Foreclosure initiated by the creditor involves a series of legal actions to repossess the property held as collateral. Your credit report will reflect a foreclosure. Instead of ‘foreclosure’, it may contain one of the following alternative terms:
- Trustee sale
- Breach
- Sheriff’s sale
- Lis pendens
- Court sale
- Notice of pendency
- Deed substitution of trustee
Short Sales
It occurs when you sell your property for less than what you have to pay. A short sale is not as bad as a foreclosure. However, it does affect your credit score.
Deed in Lieu
You can go for a deed in Lieu if you want to avoid foreclosure proceedings. In this transaction, the borrower voluntarily transfers the property’s ownership to the lender and gets released from all the obligations. It also affects your credit score but the effect is not as bad as that of foreclosure.
Cash Advances
A cash advance is a short-term loan. This indicates that there is a financial suppressor. Getting a cash advance means that you have lowered your available credit. This may lower your credit score as well.
Frequent Inquiries
When a lender pulls your credit report, this generates an inquiry on your credit report. Depending on the number and frequency of inquiries, it affects your credit score.
Bankruptcy
With bankruptcy, you can pay your debt under the federal bankruptcy court’s protection. The following two types of bankruptcy:
- Chapter 7
- Chapter 13
Chapter 7 Bankruptcy
This bankruptcy stays on your credit report for 10 years. It does not cover unpaid debts.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is “reorganization” bankruptcy. It stays on your credit report for 7 years.
In addition to your credit report, an underwriter in the loan underwriting process also verifies your assets, property details, debts and incomes. Before you submit your loan application, tr
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