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How Far Back Do Mortgage Lenders Look At Credit History? | Why Does it Matter?

Mortgage lenders typically look at a borrower's credit history as part of the mortgage application process.

Are you wondering how far back mortgage lenders look at your credit history? Here is all the information you need to have. Are you ready to learn the real truth? Let's get started.

Key Takeaways

  • Mortgage lenders look at your credit history for up to 6 years
  • Lenders use this information to assess the borrower's creditworthiness and ability to repay the loan.
  • Factors that are considered include payment history, credit utilization, credit mix, and Fico score.
  • Apart from the borrower’s credit report and history, the lender will also look at other factors such as the source of income, debt-to-income ratio, regularity of income, cash reserves, and employment history, just to name a few
  • It's important for borrowers to have a strong credit history before applying for a mortgage, as it can greatly impact their chances of getting approved and the terms of the loan.

How Far Back Do Mortgage Lenders Look at Credit History

Mortgage lenders are in the business of lending money to borrowers to purchase or refinance a property. As such, mortgage underwriters need to assess the risk of lending to a borrower, and one of the ways they do this is by looking at the borrower's credit report and history from credit bureaus.

Typically, mortgage lenders will look at a borrower's credit history for the past 6 years. This information can be accessed through the borrower's credit report.

Credit Report Information that Lenders Are Interested in

A credit report includes information on the borrower's payment history, including how many times they have defaulted on their payments and with which lender.

It also includes the borrower's credit score, which is a numerical representation of the borrower's creditworthiness. Additionally, the credit report will show the many years or months the borrower has lived at their current address.

MOrtgage loan agreement document with a keychain

Why Do Lenders Look at Credit History for Mortgage Applications?

Mortgage lenders use this information to determine the borrower's risk of defaulting on their mortgage loan. A borrower with a strong credit history, great credit score, and a long history of living at the same address is considered to be a lower risk than a borrower with a bad payment history, low credit score, and a short history of living at the same address.

It's important to note that a credit report is not the only factor that mortgage companies consider when assessing a borrower's risk. They also take into account the borrower's income, employment history, and the value of the property being purchased or refinanced, etc.

What Is a Good Credit Score for A Mortgage?

A good mortgage credit score is typically considered to be 620 or higher. This is the minimum credit score that most lenders require in order to approve a mortgage application.

You Have a High Chance of Mortgage Approval with 620 And Above

A credit score of 620 or higher indicates that you are a responsible borrower. As a result, if you build a good credit score, you are more likely to be approved for a mortgage and to be offered more favorable terms, such as lower interest rates.

However, it's worth noting that a credit score of 620 or higher is not a guarantee of approval. Lenders will also consider other factors such as your income, employment history, and debt-to-income ratio when deciding whether to approve your mortgage application.

Great credit score shown on a clock

How Does A Mortgage Lender View Your Bad Credit Report?

On the other hand, if you have a credit score lower than 620, your chances of being approved for a mortgage are much lower, and if you do get approved, the mortgage interest rates will be high.

This is because lenders consider borrowers with bad credit scores to be a higher financial risk and therefore, they are more likely to default on their mortgage.

What Are the Requirements to Get a Mortgage?

When applying for a mortgage, there are several key requirements that lenders will consider in order to determine your eligibility for a loan.

Apart from credit history, which is a crucial factor in the mortgage application process, lenders will also take a close look at your source of income, debt-to-income ratio, regularity of income, require other documentation, employment history, etc.

1. Source of Income

Employment: One of the most important factors that lenders will consider is your source of income. This includes your salary, any bonuses or commissions you may receive, and any other sources of income such as rental properties or investments in order to ensure that you have the ability to make the monthly mortgage payment.

Lenders will typically require 2 years’ documentation of your income, with tax returns.

Lenders will also take a close look at the regularity of your income, in order to ensure that you have a stable source of income that can be used to repay the loan.

Self-Employment: To get a mortgage as a self-employed individual, you will typically need to provide documentation that verifies your income. This may include tax returns, financial statements, and profit and loss statements.

In addition, you may need to provide documentation that verifies your self-employed status, such as a business license or articles of incorporation. Some lenders may also require a larger down payment or a co-signer to offset the risk of lending to self-employed individuals.

Mortgage form with a calculator

2. Debt-To-Income Ratio

Another key factor that lenders will consider is your debt-to-income ratio. This is a measure of how much of your income is going towards paying off debt, such as credit card balances, car loans, and student loans.

How Much Debt Do I Need to Have to Get a Mortgage?

Lenders typically want to see a debt-to-income ratio of less than 43% in order to approve a mortgage application.

3. Other Documentation

When applying for a mortgage, there are several additional documents that may be required by the lender. One of the most important is your Social Security number, which is used to run a credit check and verify your identity.

You will also need to provide a valid driver's license or government-issued ID, which will be used to confirm your name and address.

Other documentation that may be required includes proof of assets, such as bank statements or investment account statements. Additionally, you may be required to provide proof of insurance, such as homeowners or hazard insurance, as well as documentation related to the property you are purchasing, such as the sales contract or title report.

Woman in yellow signing a document

What Do Mortgage Lenders Look for On Bank Statements?

Mortgage lenders look at bank statements to assess a borrower's ability to repay the home loan or mortgage payments. They will typically review the past two to three months of bank statements to check for consistent income, and enough savings to cover down payment and closing costs.

Lenders also look for red flags, such as bounced checks or a high number of overdrafts, which may indicate financial instability.

Check The Ability to Pay the Conventional Loan

Lenders also use bank statements to verify the borrower's income. They will check for regular deposits from an employer or other sources of income, such as rental property or investments.

Red Flags

They will also look for any large, unexpected deposits or withdrawals, which could indicate fraud or an inability to manage money.

In addition to checking for red flags, lenders also look for evidence of savings. They will check for consistent savings deposits and a healthy balance in the borrower's account. This shows the lender that the borrower has the ability to save and is likely to have the funds necessary to make a down payment and cover closing costs.

About Dusan Stanar

I'm the founder of VSS Monitoring. I have been both writing and working in technology in a number of roles for dozens of years and wanted to bring my experience online to make it publicly available. Visit https://www.vssmonitoring.com/about-us/ to read more about myself and the rest of the team.

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