The Truth About Credit
…Before It Can Cause You Problems!
Most homebuyers worry about how their credit report will affect their ability to buy a home.
Many of those people do not need to worry about their credit history. However, you can be better prepared if you get a copy of your credit report to review before you apply for your mortgage. That way if there are any errors, you can take steps to correct them before you make your application.
Be prepared to discuss credit problems honestly with a mortgage professional.
Come to your application meeting with written explanations. 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.
Keep in mind the following concepts:
1. ABC’s of Mortgage Credit
Mortgage lending ABC’s gets its name from the grading of credit based on such things such as payment history, account balances, bankruptcies, equity position, and credit scores.
When trying to figure a credit grade, keep in mind the following principles:
– When you have derogatory credit, all of the other aspects of the loan need to be in order; equity, stability, income, documentation, assets, etc., play a larger role in the approval decision.
– When determining your grade, various combinations are allowed, but the worst case will push your grade to a lower credit guide; mortgage late payments and bankruptcies are the most important.
– Credit patterns are very important. A high number of recent inquiries and more than a few outstanding loans may signal a problem. A “willingness to pay” is important; late payments in the same time period are better than random late payments as they signal an effort to pay even after falling behind.
2. Credit Scoring
Credit scoring is a statistical method of assessing the credit risk of a loan applicant. The score is a number that rates the likelihood an individual will pay back a loan. The score looks at the following items: past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries.
Credit scoring will place borrowers in one of three general categories.
a) A borrower with a score 680 and above will probably be considered an A+ loan. The loan will involve basic underwriting, probably through a “computerized automated underwriting” system and be completed within minutes. Borrowers falling into this category have a good chance to obtain a lower rate of interest and close their loan within a few days.
b) A score below 680 but above 620 will probably indicate that underwriters will take a closer look at the file to determine potential risks. Borrowers falling into this category may find the timeline to be no different than in the past. Supplemental credit documentation and letters of explanation may be required before an underwriting decision is made. Loans within this scoring range may allow borrowers to obtain “A” pricing, but loan closing may still take several days or weeks.
c) Borrowers with a score below 620 may find themselves locked out of the best loan rates and terms offered. These borrowers may be referred to alternate funding sources and they may find the loan terms and conditions less attractive. It may take some time before a suitable funding source is located.
As more companies utilize credit scoring, the loan approval and closing time will be compressed for most consumers.
3. Correcting Errors
Under the Fair Credit Reporting Act, you have the right to dispute the completeness and accuracy of information in your credit file. When a credit reporting agency receives a dispute it must re-investigate 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 only to another person, the credit reporting agency must delete it. 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 those items in your file 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 may send a brief statement to the appropriate credit reporting agency. The information will be placed in your credit file and will be disclosed each time your credit file is accessed.
4. Credit Profiles
A Credit Profile is a consumer credit file and is made up of various consumer credit reports. It is a picture of how you have paid back the companies you have borrowed money from and how you have met other financial obligations.
The usual categories of information on a credit profile are:
– Identifying Information
– Employment Information
– Credit Information
– Public Record Information
– Credit Inquiries
The following is NOT included on a credit profile:
– Driving record
– Criminal record
– Political preference
5. Access to Credit Reports
The Fair Credit Reporting Act (FCRA) is the federal law regulating credit reporting companies like Equifax, Experian, and Trans Union. It has been in effect since 1971. A revised FCRA became effective October 1, 1997. This law protects consumers’ rights, such as the right to review and contest information in their credit profiles as well as specifically defining who can access the information in a credit profile and how notification of this activity is made.
The FCRA states that businesses must have a “legitimate business need” and a “permissible purpose” as stated in the federal law to obtain a credit file. Otherwise, only those to whom you give written permission can access your credit files. For instance, your neighbors, friends, co-workers and family members cannot access your credit profile unless it is authorized. Businesses that can access your credit file include:
– Credit grantors
– Collection agencies
– Insurance companies
Notification of inquiries into your credit profile are provided in your report. Any company that receives a copy of your credit profile will be listed under the “Inquiry” section of your report.
6. Credit Questions & Answers
Why do we need credit reporting?
– Reporting provides the information that helps consumers make purchases, secure loans, pay for college educations and manage personal finances. Credit reporting makes it possible for stores to accept checks, banks to offer credit and debit cards, businesses to market products and corporations to better manage their operations.
What is a credit inquiry?
– An “inquiry” is a listing of the name of a credit grantor or authorized user who has accessed your credit file. Each inquiry is posted to the credit file so you know who has obtained a copy of it. Credit grantors post an inquiry before offering you a pre-approval 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.
How does divorce affect consumer credit?
– A divorce decree does not supersede the original contract with the creditor and does not release you from legal responsibility on any account. You must contact each creditor individually and seek their legally binding release of your obligation. Only after that release can your credit history be updated accordingly.
Should I use one of those companies that promise to help correct my credit?
– Beware of companies that promise to remove accurate information from a credit file; accurate information cannot be removed from a credit file. There is nothing they can do for you that you cannot do for yourself by contacting the credit reporting agencies directly. A delinquent credit history can only be corrected by the passage of time and prompt payments.
We sincerely hope these tips and ideas are of value to you. If there is any way we can be of service, please contact our office. We would consider it a privilege to be of service to you! If you would like a FREE consultation, Contact Us at any time. If you are ready to get started and would like to find out more information about getting financed, please visit my Mortgage Information Page.