Many existing and prospective homeowners are either unaware of or regrettably pay too little attention to the impact that their credit profile can have on their ability to acquire new or additional mortgage financing.
Credit History in T&T
The whole notion of having 'a good credit history/rating' is still a relatively new concept for consumers, not only here in Trinidad and Tobago, but even in the wider Caribbean region. Over the past few years, however, the extremely competitive and aggressive nature of the local lending industry increased the need for financial institutions, including mortgage finance companies, to place a greater emphasis on an individual's credit history when evaluating the ability of a borrower to repay and the likelihood that repayment will be consistent and timely.
In 2004, the Automated Credit Bureau (ACB), to which all commercial banks and the TTMF are subscribers, became the first and only automated, on-line credit reporting agency in Trinidad and Tobago. This was a significant enhancement in the financial landscape of our country, as it introduced international best practice and standards to lenders in the area of credit and risk assessment. As subscribers to the Bureau, lending agencies are able to access information on a customer’s credit history/profile from each of the other member subscribers.
How then, does the advent of the ACB, and its impact on the credit adjudication practices of its members affect existing or potential homeowners? First of all, it is important that persons understand the body of information that comprises their credit profile.
Understanding Your Credit Profile
A credit profile, as provided to a subscriber of the ACB, is essentially a report on how current loans are being repaid, as well as how previous financial obligations were serviced by the prospective borrower.
An individual can obtain a copy of his/her credit report from the Bureau. The credit report provides details such as:
- The types of credit facilities that have been granted, i.e. consumer loan, credit card, mortgage etc.
- The amount of credit granted.
- The length of time that the accounts have been open.
- Whether or not the loans were paid on time.
- Whether any additional requests for credit were made.
There are usually 5 categories of information contained on an individual's credit profile:
- Personal Information – name, identification, date of birth etc.
- Residence History – This provides information on the address and time spent at current and any previous residences.
- Employment History – This provides information on current and any previous employers, the position held and the time spent in the job.
- Credit Information – This details the various credit facilities that were granted and how they have been or are being repaid.
- Inquiries – This gives an indication as to whether and from whom, attempts to obtain credit facilities were made.
The credit profile/report can indeed either positively or negatively affect one's ability to complete the mortgage process. It is therefore imperative that persons, especially those seeking to purchase a new home, are prudent and disciplined in their approach toward credit.
Improving your Credit Profile
If you have had past credit problems, however, then you should be prepared to discuss them honestly with your mortgage officer. A responsible mortgage professional knows that there can be legitimate reasons for credit problems, such as unemployment, illness or other financial difficulties. If you have had a problem that has been corrected and your payments have been on time for a year or more, it is quite likely that your credit may be considered satisfactory and improving.
Once you have corrected your credit problem, to further improve your profile it is important to ensure that you make your monthly payments (e.g. credit card) on time. Late payments may result in late fees and/or higher interest charge and leave a negative mark on your credit profile.
If you are currently at the optimum level of debt based on your existing income level, you should seek to improve this situation, as soon as possible, particularly if your goal is to acquire a home in the short to medium term. In assessing your ability to qualify for a mortgage, a key factor that the finance company will consider is your ability to service the debt. This is the percentage of your monthly gross income that is committed to debt servicing, which for mortgage purposes must not exceed 40%.
It means, therefore, that in terms of your credit profile, you should ensure that you repay as many of your loans as possible by the time that you are ready to submit your application to the Mortgage Finance Company. The lower your level of debt at the time of application for home financing, the more affordable your new home is likely to be.
In the pursuit of your dream to either acquire or upgrade your home, your credit history is key, as it tells the story about your attitude towards and ability regarding credit and debt servicing.
In deciding to acquire a mortgage, you should adopt and follow a strategy of consistency and timely repayment of all debt to ensure that your credit story has a 'happy ending'.