What you can say to your lender

You've been pretty good about keeping your credit rating up. Always paid on time, every time. There may have been a late payment or two a few years back, but you never took anyone for their money. But today you got a phone call from your loan officer wanting "credit explanations" regarding some items that happened about two years ago. Why? You were late!

Tip #6 - What You Can Say to Your Lender

First, let's define what "late" means from a mortgage lender's perspective. When you open your credit card statement, you'll see a statement date and a due date. Lenders only really care about anything that is more than thirty days past the due date. If the due date is the 15th of the month and the credit company posted your payment on the 20th of that same month, it's not considered late for credit reporting purposes. However, if your payment is posted more than thirty days past the due date, then you've got a "late" payment which may count against you when applying for a mortgage.

CAUTION! While payments less than 30 days overdue may not show up on credit reports, credit reports should not be the only concern raised by late payments. Late payments can trigger penalties, revised loan terms and contract defaults with creditors. If you borrow, make a point of paying on time and in full.

More and more lenders rely on credit scoring and automated underwriting systems when making a credit decision. However, even these automated systems may still "ask" for a satisfactory explanation of previous credit transgressions.

So what do you say when the lender calls wanting an explanation?

The Truth. Over the years there have been many phone calls from frantic borrowers wanting to know what they should say when asked for a credit explanation. "It's been almost two years since I made a late payment on my department store credit card. I have no clue why it was late, much less remember the circumstances!"

Then explain it that way.

Lenders aren't looking for some outlandish reason your payment was late. No "my dog ate it" tale is required. Usually, a simple answer such as "I thought I had made the payment on time" or "I really can't recall, I've never been late before or since" or even "I forgot" can work.

Just tell the truth and move on. Many times the lender just wants to fulfill an underwriting guideline which requires them to provide a credit explanation along with any derogatory credit entry. That's really about it.

Remember that lenders do not expect perfect credit. People do make mistakes and payments are missed. It happens even to people with great credit--it just doesn't happen often.

Major credit problems such as bankruptcies or foreclosures will require more homework and detail. Sometimes lenders want to ascertain that the bankruptcy or foreclosure was something beyond the borrower's control, something caused by a disability, loss of job and so on. And a lot of times they'll want some third-party verification to verify what caused the financial problems, proof such as medical bills in the event of an extended illness or injury, or evidence that in fact you were indeed laid off and couldn't find work.

But just remember that if ever a lender needs an explanation regarding a credit issue: answer truthfully.

Tip #7 - "To Lock or Not to Lock" will be emailed to you next. This will be your last article in this series.

We certainly hope you enjoyed this report. Please feel free to forward it to anybody who might benefit from the information.
 

Ken Kichler
Century 21 Arizona Foothills