Disclaimer: This article is not legal advice. Any legal information is not the same as legal advice, where an attorney applies the law to your specific circumstances, so you should consult an attorney if you’d like advice on your interpretation of this information or its accuracy. You may not rely on this article as legal advice, nor as an endorsement of any particular legal understanding.
A credit report is almost like a personal identification number. As important as having a social security card or a photo ID, most people will find it difficult to rent or lease almost anything without this data. When it comes to real estate, a credit report may be one of the most significant documents that financial and lease experts will review when helping in a new home search. Learn more about what is a credit report, a person’s rights within the system, and how these reports apply to a home purchase or rental lease.
What is a credit report?
A credit report is a document and tool that lenders and landlords will review to decide whether loaning a person or persons money or property is a good idea. This report is often used to gauge risk on the chance that the party will pay back the creditors any money owed, as well as pay that money on time. Credit reports will list out current and past debts as well as view a record of payment, which may include a credit score.
Understanding what is a credit report
Officially, the Consumer Financial Protection Bureau defines a credit report as:
A credit report is a statement that has information about your credit activity and current credit situation such as loan paying history and the status of your credit accounts.
More clearly, a credit report is a bit like a report card for “adulting”. Companies use the records on these reports to generate a score of creditworthiness. The information on a report includes personal info like name, birth date, and social security number. The listing will then detail credit accounts such as revolving credit (think credit cards) and non-revolving credit (think car loans). In addition, the report will reflect any negative remarks like liens, foreclosures, bankruptcies, and civil suits or judgments, as well as a listing of who has inquired about this credit history (besides the person named in the report).
Who provides credit reports?
Credit reports are created by the three primary credit reporting agencies, Equifax, Experian, and TransUnion. All persons are entitled to obtain one free credit report annually, according to the Fair Credit Reporting Act (FCRA), a federal law, which requires this. This service can also be used to correct any errors that may be on a report. The free federally mandated reports can be obtained from only one website at AnnualCreditReport.com. Requestors must complete the Annual Credit Report Request Form and mail it to Annual Credit Report Request Service, P.O. Box, Atlanta, GA 30348-5281.
What is the best site to get a credit report many people ask? That depends on the services a person is looking for. If only one credit report per year is required, the above lawfully monitored website is a great way to go. If a person is looking to build credit, or repair credit damage instead consider many of the available credit monitoring services. Since each service monitors different aspects of a credit report, it’s worth further exploration before choosing the right credit service.
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How is a credit score calculated?
The most common credit score used is referred to as a FICO® Score. FICO® isn’t an acronym for a federal law or regulation but instead stands for Fair Isaac Corporation. This score is used by 95 out of 100 of the largest U.S. financial institutions and the Top 10 organizations in the Fortune 500.
The exact calculations used to create this score vary by person as different factors may weigh differently, but in general, scores are drawn from the following percentages and criteria: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%). It’s widely understood that the company uses the information provided by the 3 main credit reporting agencies to create a risk ranking of how likely a person is to pay their credit obligations as promised.
VantageScore provides a credit score that directly competes with the FICO®. VantageScores have been gaining ground and were used by about 12 billion lenders between June 2018 and July 2019 according to research firm Oliver Wyman. VantageScore weights factors like payment history is “extremely influential,” and recent credit behavior and debt are “less influential.” Many factors between the two reports are the same, however.
What is a good credit score?
For both reporting agencies, scores range between 300 and 850. Scores over 700 are generally considered “good” and scores below 600 “poor”. FICO® scores have a somewhat different distribution where the lines are drawn between excellent, good, fair, and poor than does Vantage. Among collected scores, 67% of American’s have a good or better FICO®, while 61% of American’s have a score of fair or better with Vantage.
Credit reports and home purchase
Credit reports are regularly used as part of the home purchase process. Mortgage lenders are financing loans for decades, usually 15 to 30 years so they want to be as sure as possible that the lender will repay as promised. Even for cash and nontraditional purchase, a credit report can help provide reassurance to the seller that the deal will go through as promised.
Learn how credit reports are used in the mortgage process.
Understanding mortgage applications and credit
A mortgage lender knows that each of the main credit reporting agencies has a somewhat different result. When considering hundreds of thousands of dollars, the lender wants a larger picture. For this reason, lenders will typically pull one of two reports. The first type of report is called a tri-merge credit report because the data from all three main agencies (Experian, Transunion, and Equifax) is merged into a single easy-to-read report for the lender.
The second kind of report is called a residential mortgage credit report which merges data from 2 OR 3 of the main reporters and which may share insight that isn’t listed in one of your single reports, such as your employment and income.
For these reasons, it’s important to understand your rights regarding credit inquiries.
When can a real estate agent legally obtain a credit report of a client?
Technically, a real estate agent should not need a credit report for a home sale. Realtors generally only need an actual copy of a report when acting as a leasing agent. An agent may casually inquire about financial readiness for a purchase, but this is typically more of a screening tool to help prospective buyers find the right kind of mortgage and financing. A mortgage lender or broker will be the one to obtain the full report.
While it is not a legal requirement for a purchaser to share their credit report, it is also not a legal requirement for a lender to provide an incomplete application financing. Expect a credit report to be part of any mortgage process.
Hard inquiries and credit reports
A mortgage inquiry, or even a rental inquiry, will create what is known as a hard inquiry on a credit report. This will be recorded by reporting agencies and typically causes a short downturn of a few points in a credit score. Mortgage applicants will only get penalized for a single hard inquiry during a 45 day period if choosing to check with multiple loan brokers.
Hard inquiries typically stay on a credit report for 2 years, but usually only affect credit for 1 year.
Mortgage options for purchasers with lower credit scores
While excellent credit will typically provide the most mortgage options and the best rates, lower credit scores will not automatically block an applicant from purchasing a home. FHA loans and VA loans can sometimes offer loans to those with scores as low as 580, and different factors such as total cost of loan and total debt-to-income ratio may be contributing factors.
Tenant Credit reports for lease and renting
It will be very rare to find a leasing agent or agency now that does not require a tenant credit check prior to renting. The primary exception is likely a private landlord that may have a personal connection to you or your employer, but after the many COVID moratoriums that is also becoming less common.
This increased importance on digital data is due in part to many owners using primarily digital leasing tools, as social distance and remote communication have increased.
Whether this reliance on digital data instead of an added personal touch of an in-person interview helps alleviate potential discrimination or increase it has yet to be seen, but expect to here more about this subject.
Basics of tenant credit reports and renting
Landlords and rental managers are generally allowed to request a copy of a tenant's credit report to review before any potential lease is signed or approved. This copy must be requested with the applicants approval, and is typically done with information provided by the applicant themselves.
The credit report is often obtained by charging a fee for the reporting service and sometimes also for the labor involved in processing the application. These fees should be clearly communicated with the applicant and charged in good faith for an available or upcoming unit. Credit report fees may not be used for any purpose other than those stated above.
If the results of the tenant credit report are acceptable, as well as the other conditions required for rental, the landlord will offer the applicant a lease.
Managing a lease denial due to credit
But what if the tenant credit report results in a denial? First of all, tenants are always allowed to obtain a copy of the credit reports obtained by a lessor (the party offering the rental). A landlord may instead choose to charge a higher rent or deposit based on credit history. If the applicant feels this credit report was in error, they may protest the facts with the reporting agency according to the Fair Credit Reporting Act. (15 U.S.C. §§ 1681).
A landlord is able to choose the criteria for an acceptable rental, setting the credit number considered unacceptable, but also choosing to weigh certain factors higher (such as unpaid rent) or lower (such as outstanding medical balances). As long as this criteria applies to all applicants and not a certain few. Landlords may also not keep personal credit reporting data after a denial beyond that needed to identify the applicant and track the application status.
Local laws and credit reports for rentals
The use of a tenant credit report in a lease is always subject to federal laws and may be subject to local state, county, or city laws as well. For example, California limits the dollar amount that can be charged to the tenant to obtain a credit report (Cal. Civ. Code § 1950.6.). whereas Wisconsin requires landlords to accept credit reports provided by a tenant under certain conditions (Wis. Stat. § 704.085(1)(b) (2019).
Has COVID changed the importance of credit reports?
COVID-19 has adjusted regulations and practices across the whole world, and the real estate and credit industries are no different. The CARES act changed credit reporting by allowing accounts to continue to show as current while under pandemic-related forbearances and moratoriums. As shared by Experian, this reporting law is in effect for:
guidelines for all agreements made between January 31, 2020, through either July 25, 2020 (120 days after March 27, 2020, when the law was enacted), or 120 days from the date the COVID-19 national emergency is declared over
During the pandemic, the average consumer credit score has continued to rise from 703 to 710, yet as of December, 2020 at least 3 percent of American’s were in a financial hardship program while still reporting as current on payments -- numbers which could change drastically if repayment terms are not met.