Since credit history is such a critical part of the real estate industry, it is imperative that we, as borrowers, and as real estate or discounted note investors, understand how the credit reporting industry works, and that we understand how to interpret what a credit report actually says.

Whether it's a credit card, a gas card, a department store card, a car loan, a lease, a bank loan, a rental application, a home equity loan, a mortgage, or any other situation where one party is asking another party to temporarily foot the bill, there is a decision being made - either to extend the credit, or not to extend the credit.

If the investor does not get their cash back, or if they get it back more slowly than they had planned on, they have a loss - a loss of profit, or a loss of both profit and their original cash. Like you and me, nobody is in business to lose money on purpose. And, like you and me, nobody is in business to work for no pay.

So let's get clear on one point - a real estate lender is in business for one reason - to make a profit by loaning money out... AND GETTING IT BACK, WITH A PROFIT! And if they don't get it back on time, they are losing money!

While collateral is important in real estate lending, the property is not what drives the deal. Real estate lenders to not want the property, they want their payments made, and made on time. In fact, it is historically documented by government and industry studies that lenders lose money when they have to take a house back on a defaulted loan. The real importance of the real estate for the lender is your supposed commitment to it. Real estate loans are cheaper than many other kinds of loans mainly because lenders feel the property is important to the borrower, and the borrower will do everything possible to keep it.

Every time an underwriter approves or rejects a credit request, it is based on one factor... Risk Analysis. Although evaluating the property is a major part of mortgage Risk Analysis, the value of the real estate, and/or the equity in the property, will not carry the day (except in very limited situations). Ultimately, it is an individual's character, capability, and credit history that drives almost all mortgage lending decisions.

The credit reporting industry exists for only one reason -- managing risk. Lenders need to manage risk, and the credit reporting industry provides lenders with the information regarding an individual's character, capability, and credit history, necessary to effectively analyze the risk associated with any particular loan decision.

Invariably, an individual's credit history is a strong indication of that individual's integrity, attitude, and discipline (character), and a measure of the individual's ability to pay his bills (capability). While not infallible, extensive research has supported the reliability of credit reports to accurately predict the risk associated with almost all loan decisions...