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Credit
Grades |
Mortgage companies often grade your loan based on certain credit-related items
such as payment history, amount of debt payments, bankruptcies,
equity Credit Scoring - How it Works
Credit scoring is
a statistical method that lenders use to quickly and objectively
assess the credit risk of a loan applicant. The score is a
number that rates the likelihood you will pay back a loan.
Scores range from 350 (high risk) to 950 (low risk). There
are a few types of credit scores; the most widely used are
FICO® scores, which were developed by Fair Isaac & Company,
Inc. for each of the credit reporting agencies.
Credit scores only
consider the information contained in your credit profile.
They do not consider your income, savings, down payment amount,
or demographic factors like gender, race, nationality or marital
status. Past delinquencies, derogatory payment behavior, current
debt level, length of credit history, types of credit and number
of inquiries are all considered in credit scores. Your score
considers both positive and negative information in your credit
report. Late payments will lower your score, but establishing
or re-establishing a good track record of making payments on
time will raise your score.
Different portions
of your credit file are given different weights. They are:
- 35% - Previous
credit performance (specific to your payment history)
- 30% - Current level
of indebtedness (current balance compared to high credit)
- 15% - Time credit
has been in use (opening date)
- 15% - Types of
credit available (installment loans, revolving and debit
accounts)
- 5% - Pursuit of
new credit (number of inquiries)
The most important
factor for a good credit score is paying your bills on time.
Even if the debt you owe is a small amount, it is crucial that
you make payments on time. In addition, you may want to: keep
balances low on credit cards and other "revolving credit;" apply
for and open new credit accounts only as needed; and pay off
debt rather than moving it around. Also don't close unused
cards as a short-term strategy to raise your score. Owing the
same amount but having fewer open accounts may lower your score.
Recent changes minimize
the negative effects that rate shopping can have on a mortgage
applicant. If there is a consumer originated inquiry within
the past 365 days from mortgage or auto related industries,
these inquiries are ignored for scoring purposes for the first
30 calendar days; then, multiple inquiries within the next
14 days are counted as one. Each inquiry will still appear
on the credit report.
Every score is accompanied
by a maximum of four reason codes. Reason codes identify the
most significant reason that you did not score higher. The
reason codes can help a lender describe the reasons for higher
than expected rates or loan denial. Scores are not part of
the credit profile and are not covered by the Fair Credit Reporting
Act.
Your credit report
must contain at least one account which has been open for six
months or greater, and at least one account that has been updated
in the past six months for you to get a credit score. This
ensures that there is enough information in your report to
generate an accurate score. If you do not meet the minimum
criteria for getting a score, you may need to establish a credit
history prior to applying for a mortgage.
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Credit
Scoring – What Your Score Means
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Credit scoring places
you in one of three general categories.
If you have a score of 680 or above, you may be considered an A+ borrower.
Your loan will involve basic underwriting, probably through a computerized
automated underwriting system and could be completed within minutes. If you
are in this category, you have a good chance of obtaining a low interest rate
and closing your loan quickly.
If you have a score
below 680 but above 620, an underwriter will probably take
a closer look at your file to determine potential risks. If
you are in this category, you may find the process and underwriting
time no different than in the past. Supplemental credit documentation
and letters of explanation may be required before an underwriting
decision is made. You may still be able to obtain "A" pricing,
but loan closing may take longer than if you had a higher score.
If you have a score
below 620, you may not be eligible for the best loan rates
and terms offered. Mortgage professionals may divert you to
alternate funding sources other than Fannie Mae or Freddie
Mac. You may find loan terms and conditions less attractive
than “A” loans, and it may take some time before
a suitable funding source is located.
If you do have negative information on your credit report, such as late payments,
bankruptcy, or too many inquiries, your best strategy may be to pay your bills
and wait. Time is often your best ally in improving credit.
The length of time
to rebuild your score depends on the reason behind your low
score. Most decreases in scores are due to the addition of
a new element to your credit report such as a delinquency or
an inquiry. These new elements will continue to affect your
score until they reach a certain age. Delinquencies remain
on your credit report for seven years. Most public record items
remain on your credit report for seven years, although some
bankruptcies may remain for 10 years and unpaid tax liens remain
for 15 years. Inquiries remain on your report for two years.
While many lenders
use these scores to help them make lending decisions, each
lender has its own strategy, including the level of risk it
will accept for a certain loan product. There is no single “cutoff
score" used by all lenders and there are many other factors
used to determine your eligibility and interest rate.
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Credit
Inquiries
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The
Fair Credit Reporting Act (FCRA) outlines specifically who can see your credit
profile. Businesses must have a "legitimate business need," and
a "permissible purpose," as stated in the federal law
to obtain your credit file. Otherwise, only you, and only those
who you give written permission, can access your credit files.
Your neighbors, friends, co-workers, and even your family members
cannot have access to your credit profile unless you authorize
it. Some examples of those who can access your credit files are:
- Credit grantors
- Collection agencies
- Insurance companies
- Employers
Any company that receives
a copy of your credit profile will be listed under the "Inquiry" section
of your report. An "inquiry" is a listing of the name
of a credit grantor or authorized user who has accessed your
credit file. Credit grantors post an inquiry before offering
you a pre-approved credit card application. These are listed
as "promotional" inquiries on your credit file because
only your name and address were accessed, not your credit history
information. They are NOT sent to credit grantors or businesses
for reasons of credit reporting. They are listed for your informational
purposes only.
The Fair Credit Reporting
Act (FCRA) is the federal law regulating credit reporting companies
like Equifax, Experian, and TransUnion. It has been in effect
since 1971 and undergoes periodic revisions by the Federal Trade
Commission. This law protects consumers' rights such as the right
to review and contest information in their credit profiles. It
also specifically defines who can access the information in a
credit profile, and how you are notified of this activity. |
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How
To
Improve Your Credit
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If you have
had credit problems, be prepared to discuss them honestly with a mortgage
professional. Responsible mortgage professionals know there
can be legitimate reasons for credit problems, such as unemployment,
illness or other financial difficulties. If you had a problem
that's been corrected, and your payments have been on time
for a year or more, your credit may be considered satisfactory.
If you are currently
in excess debt, there are four ways to control it:
If your credit is not in terrible shape, you can reduce your other expenses,
even if it means making hard choices or changing your lifestyle to fit your
income. Consider selling a second car, taking equity out of your home, applying
for a non-secured signature loan, obtaining a loan from a relative, selling
your home and paying off your debts with the proceeds and then renting, cashing
out your 401K/retirement benefits or selling family heirlooms, jewelry, etc.
If your credit is
already damaged or one of the above isn't an option, go through
Consumer Credit Counseling Services (CCCS). Check your yellow
pages for the local number. CCCS may be able to help you pay
off your debts as if you were in a Chapter 13 bankruptcy, but
you don't actually file for bankruptcy.
If CCCS won't take
you, you may want to consider bankruptcy. Claiming Chapter
13 bankruptcy takes longer than a Chapter 7, but your credit
will end up in a little better standing. Chapter 13 bankruptcy
gives you up to 5 years to pay off your debts. The disadvantage
is that you're in bankruptcy for up to 5 years plus your credit
report shows your bankruptcy for 7 more years after you have
finished paying off your debts.
If you are so far
in debt that you can never repay it, then the best solution
may be a Chapter 7 bankruptcy. A Chapter 7 bankruptcy is the
least desirable from a credit standpoint, but you are typically
out of bankruptcy in 6 months and you don't have to repay any
debt. The disadvantage is that this shows on your credit report
for 10 years from the date of filing your bankruptcy. Creditors
are starting to tighten their credit requirements, and you
may have a tough time getting future financing.
If you’re debts
are under control now, but want to improve your bad credit
history, the most important factor is to make your monthly
payments on time. Use pre-addressed envelopes enclosed with
your statements to mail your payments and call the company
if you don't receive your usual statement. Also send your payment
as early as possible if you carry a balance. Most companies
calculate interest on a daily basis, so the sooner they receive
your payment, the less interest you'll pay.
Don't procrastinate.
It's the day your payment is received that counts, not the
postmark date. Give the post office sufficient time (five business
days is a good guideline) to deliver your mail. Late payments
may mean late fees, higher interest, and/or a negative mark
on your credit report.
Never send cash. Open
a checking account if you don't have one, or spring for a money
order and keep your receipt. Finally don’t forget to tell
your creditors your new address when you move.
If you are worried
about making payments, make a list of your debts and when the
payments are due. Contact your lenders immediately if you think
you will have trouble meeting the monthly payments to arrange
a payment schedule.
Taking money from
your retirement account or tapping the cash value of your life
insurance policy to pay bills or living expenses may have serious
implications you haven't considered, so try to get advice from
an expert before you take any major financial actions.
Credit cards can be
invaluable in a crisis, since they allow you to charge items
and pay them off over time. But they can also be dangerous
if you aren't careful and charge more than you can afford.
If you do use credit cards, choose those with the lowest interest
rates and pay them back as soon as you can to cut your costs.
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Fixing
Credit Report Errors
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You
have the right,
under the Fair Credit Reporting Act, to dispute the completeness
and accuracy of information in your credit file. When a credit
reporting agency receives a dispute, it must reinvestigate
and record the current status of the disputed items within a "reasonable
period of time," unless it believes the dispute is "frivolous
or irrelevant." If the credit reporting agency cannot
verify a disputed item, it must delete it. If your report contains
erroneous
information, the credit reporting agency must correct it. If
an item is incomplete, the credit reporting agency must complete
it.
For example, if your
file shows that you were late in making payments on accounts,
but fails to show that you are no longer delinquent, the credit
reporting agency must show that your payments are now current.
If your file shows an account that belongs to another person,
the credit reporting agency would have to delete it. Also, at
your request, the credit reporting agency must send a notice
of correction to any report recipient who has checked your file
in the past six months.
For items in your credit
profile which you feel deserve further explanation (such as an
account that was paid late due to the loss of job, military call-up,
or unexpected medical bills), you can send a brief statement
to the appropriate credit reporting agency. The information will
be placed in your credit profile and will be disclosed each time
it is accessed. |
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Steps
To Take After Being
Denied A Mortgage
Loan
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It's never fun to be
turned down for a loan, but before you think you won't be able
to get credit anywhere, there are some steps you can take.
Lenders are required
by a federal law, The Equal Credit Opportunity Act, to tell you
in writing when you've been turned down for credit. Two important
pieces of information must be included in the letter you receive
when you are denied credit:
- The specific reasons
why you were denied credit (or information on how to obtain
those reasons)
- If a credit report
was used in making that decision, the name and address of the
credit reporting agency that supplied it.
If you don't understand
the reasons given for turning down your application, ask for
more information. Sometimes it can be hard to determine exactly
why your application was not approved, because these decisions
involve a lot of different factors. Don't be shy about asking,
though, since the information you receive may help you improve
your credit so you can qualify in the future.
You may be denied credit
for various reasons, including not meeting the creditor's minimum
income requirement or not being at your address or job for the
required amount of time.
If your loan application
was rejected because of insufficient income to afford the house
you want or you have insufficient funds for closing costs and
a down payment, you could consider loan programs for low- to
moderate-income borrowers with lower down payment requirements,
such as an FHA loan or VA loan.
If you requested the
loan amount which is larger than 95 percent of the appraised
property value, the chances are that loan will be denied. In
this situation:
You can try re-negotiate
with the seller for the purchase price to lower the loan amount
Make an additional down payment to cover the difference between the appraised
value and purchase price
- If you think the
appraiser undervalued the property suggest that the lender
re-examine the appraisal
- If your loan is turned
down because of a poor credit report, you are entitled to a
free copy of that report. You must request it within 60 days,
so don't wait to order it. Read your report carefully to make
sure it is accurate and complete.
Once you have a copy
of your credit report, you should check for errors and fix any
errors by disputing them with the credit report agency. If you
believe that mistakes on your report led to the rejection of
your application, you can ask the credit bureau to send a corrected
copy to the lender. Follow up with the lender to find out if
your application can be reevaluated.
Finally, you can try
again. All lenders have different approval standards. Just because
you didn’t get a loan from one financial institution doesn't
mean you can't get one somewhere else. Try again with another
company. Just don't apply for more than four or five loans in
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Credit
Reporting
Agencies |
Credit Reporting
Agencies collect information about you and your credit history from public
records, your creditors and other reliable sources. These agencies
make your credit history available to your current and prospective
creditors and employers as allowed by law. Credit agencies do
not grant or deny credit.
The credit reporting
agencies are:
Equifax
PO Box 105873
Atlanta, GA 30348
800-685-1111
Experian
PO Box 2002
Allen, TX 75013
Consumer Credit Questions
888-EXPERIAN (888-397-3742)
Trans-Union
PO Box 390
Springfield, PA 19064
(800) 916-8800
(800) 851-2674
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