Credit report and analysis

When determining whether to grant a mortgage, the lender must assess the applicant’s capacity and willingness to repay his debts.

The borrower’s credit history, as reflected in the credit report, is increasingly considered by lenders to be the most accurate indicator of his capacity and willingness to pay. If the credit history shows that a borrower does not have a long credit history, or has had difficulty or shown unwillingness to make payments on a previous loan, the lender will need to be convinced that this is outweighed by strong evidence in the borrower’s favour, or by an acceptable justification of the borrower’s situation, with supporting evidence, in order to grant a loan.

In other words, a borrower’s credit record is normally a reliable indicator of how well he will meet his future obligations.

What is a credit report?

A credit report is a detailed description of the applicant’s past and present credit records. It is used to assess the applicant’s future financial situation and behaviour. It contains the repayment history of financial obligations, and the nature and duration of sources of income (job and employer). The credit report also contains a list of the applicant’s current financial obligations, including balances on any outstanding credit (loans, credit cards, lines of credit, mortgages, student loans, etc.).

However, the credit report contains only those obligations that have been declared by subscribers to the service. The borrower may have other debts; it is therefore important to obtain detailed explanations from the borrower and to compare his assets and liabilities with what appears on the credit report.

Credit report review

There are two major consumer credit agencies in Canada: Equifax and TransUnion.

Although each agency has its own report, the information contained in both is essentially the same. Mortgage professionals must review the contents of the credit report carefully, and follow the recommendations below.

Credit score

This is a rating that indicates the probability that a borrower will repay the loan according to the terms of the agreement. The credit score summarizes all the information the agency has in its credit file and presents the result as a single score. Several credit scores exist; the best known is the Beacon score.

Unfavorable credit score with a loan-to-value ratio above 90%.

If a discharged bankruptcy or other adverse credit experience is more than three years old, the application may be considered provided that credit standing has been restored to the financial institution’s standards, debt ratios are low, and employment and income are stable and have been properly verified.