Since borrowers do not have personal relationships with the finance companies loaning them the money needed to buy real estate, there needs to be a system in place that allows such lenders to evaluate the risks associated with each individual applicant. For this reason, every single lender will obtain a copy of the loan applicant’s credit profile, and such information will be used for evaluation and risk assessment.
Your Credit Report is a Record of Your Habits – The independent organizations that maintain your credit profile are simply acting as independent and unbiased record keepers for your financial history. All lenders, as well as multiple other organizations and industries, will report their transactions with consumers to the credit bureaus. It is considered generally accepted knowledge that human beings are creatures of habit, therefore it is rare that a person will change the manner in which he handles his finances.
Your Credit Report Reflects The Lenders Risk in Lending To You – For this reason, obtaining a credit report as a means of assessing risk seems a fair and accurate method. With an applicant’s entire credit history, some expanding for decades, a lender has the ability to look back in time to see how the applicant handled other credit accounts or loans. Depending on the consumer’s track record, each lender will decide how risky it would be to their organization to loan such substantial sums of money to that individual.
The lender’s risk assessment will translate into an interest rate attached to the loan. The interest on such loans is the lender’s method of obtaining profit, and taking a chance on handing over extremely large amounts of money. Those applicants with higher credit scores will be perceived as being less risky, therefore the lender will be less concerned with potential losses because that particular borrower appears to have a better routine.