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Mortgages and Credit Reports
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Many home buyers are very worried about
how their credit report will affect their ability to buy a home.
We even heard one story that an applicant was denied a mortgage
because he had returned a rented videotape late!
Of course, that could never happen. Most people will not need
to worry about the effects of their credit history during the
mortgage process. 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.
If you have had credit problems, be prepared to discuss them
honestly with a mortgage professional and come to your application
meeting with a written explanation. 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.
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ABC's of Mortgage Credit |
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The mortgage industry tends to create
its own language and credit rating is no exception. BC Mortgage
lending gets its name from the grading of one's credit based on
such things such as payment history, amount of debt payments,
bankruptcies, equity position, credit scores, etc.
We have compiled a guide to help you estimate your credit
grade. This is only a guide as many companies have exceptions that
may result in more strict or more lenient guidelines.
A General Guide to Credit Grades
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The figures shown here are estimates.
When trying to figure your credit grade, keep in mind the
following principles:
- Other Things Being Equal-When
your have derogatory credit, all of the other.phpects of the
loan need to be in order. Equity, stability, income,
documentation, assets, etc. play a larger role in the approval
decision.
- Worst Case Scenario-When
determining your grade, various combinations are allowed, but
the worst case will push your grade to a lower credit guide.
Mortgage Lates and Bankruptcies are the most important.
- Going Once, Going Twice-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, thus late payments in the
same time period is better than random lates as they signal an
effort to pay even after falling behind.
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Credit Guide Scoring?
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In a nutshell, 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, number of
inquiries.
Credit scoring will place borrowers in one of three general
categories.
- First, a borrower with a score 680 and above may 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 may have a good chance to obtain a lower rate of
interest and close their loan within a couple of days.
- Second, a score below 680 but above 620 may indicate
underwriters will take a closer look at the file in determining
potential risks. Borrowers falling into this category 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. Loans
within this FICO scoring range may allow borrowers to obtain "A"
pricing, but loan closing may still take several days or weeks
as it does now.
- Third, borrowers with a score below 620 may find themselves
locked out of the best loan rates and terms offered. Mortgage
professionals may divert these borrowers to alternate funding
sources other than FNMA and FHLMC. Borrowers may find the loan
terms and conditions less attractive than the "A" loans, and 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. In the future,
a high FICO score may be your ticket to a speedy and competitively
priced mortgage loan.
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How to Correct 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 showed that you were late in making
payments on accounts, but failed to show that you were no longer
delinquent, the credit reporting agency must show that your
payments are now current. Or if your file showed an account that
belongs only 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 those 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 may send a brief statement to the appropriate credit reporting
agency. The information will be placed on your credit profile and
will be disclosed each time your credit profile is accessed.
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Credit Profile
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A Credit Profile refers to a consumer
credit file, which is made up of various consumer credit reporting
agencies. It is a picture of how you (as an individual) paid back
the companies you have borrowed money from, or how you have met
other financial obligations.
There are usually five categories of information on a credit
profile:
- Identifying Information
- Employment Information
- Credit Information
- Public Record Information
- Inquiries
What is NOT included on your on a credit profile:
- Your race
- Your religion
- Your health
- Your driving record
- Your criminal record
- Your political preference
- Your income
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Credit Report Access
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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.
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. 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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Credit Questions & Answers
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Why do we
need credit reporting?
Credit reporting is needed because it provides the information
that helps consumers make purchases, secure loans, pay for college
educations, and manage their personal finances. Credit reporting
makes it possible for stores to accept your checks, banks to offer
credit and debit cards, businesses to market products, and
corporations to better manage their operations to benefit the
world's economy.
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.
What is the Fair Credit Reporting
Act?
The Fair Credit Reporting Act (FCRA) is the federal law regulating
credit reporting companies like Equifax, Esperian, 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. It also specifically defines who can access the
information in a credit profile, and how you are notified of this
activity. You may obtain a copy the FCRA from the
Federal Trade Commission.
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 accounts. You must contact each creditor individually and seek
their legal 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?
It's your choice. However, beware of companies that promise to
remove accurate information from your 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. Only time will heal a
delinquent credit history.
What if an item on my credit
profile is correct, but I disagree with it being reported?
For those 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 may send a brief statement to the appropriate credit reporting
agency. The information will be placed on your credit profile and
will be disclosed each time your credit profile is accessed.
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FICO Scores
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FICOŽ scores were developed by Fair
Isaac & Company, Inc. for each of the credit repositories. The
scores are: (Equifax) BeaconŽ, (Experian formerly TRW) Experian/FICO
and (TransUnion) EmpiricaŽ. They are simply repository scores
meaning they only consider the information contained
in a person's credit file; they do not consider a
persons income, savings or amount of a down payment for a
mortgage.
The scores were designed to assess risk. They are useful in
directing applications to specific loan programs and to set levels
of underwriting, i.e. streamline, traditional or second review.
The scores are objective, consistent, accurate and fast.
Many people in the mortgage business are skeptical about the
accuracy of FICO scores. Scoring has only been an integral part of
the mortgage process in the past few years; however, the scores
have been in use since the 1950's by retail merchants, credit card
companies, insurance companies and banks for consumer lending. The
data from large scoring projects emphasizes the accuracy, the
predictive quality of the scores. Large portfolios have been
scored for mortgage servicing and investment groups, and again,
they demonstrate that FICO scores work.
The scores were developed from each repository's database using
actual loan performance. A sample of over 750,000 consumers per
repository was used. The repositories have each made great strides
to increase the accuracy of their respective database through
computer technology and internal monitoring. There is a new
standard reporting format for credit grantors to use when sending
electronic information to the repositories; this is the critical
first step to providing accurate data.
The scores use a multiple scorecard design. Each repository
uses 10 individual scorecards, and the models at each repository
are the same. This increases accuracy and optimizes the predictive
variables for each subpopulation. (For example, a borrower with
two 30-day late payments will be scored against a population with
some minor delinquencies.) This feature may cause a borrower with
delinquencies to score in the same range as a borrower without
delinquencies. Scorecards are reviewed and updated every
twenty-four months.
The actual scoring process is proprietary, and the algorithms
are copyrighted. We can share the predictive variables, the
portion of the credit file considered and the weight as provided
by Fair Isaac. They are:
- Previous credit performance (35%)
- Current level of indebtedness (30%)
- Time credit has been in use (15%)
- Types of credit available (15%)
Installment loans, revolving accounts, debit accounts
- Pursuit of new credit (less than 5%)
FICO has changed the way it factors credit checks, inquiries.
These changes should minimize the "negative" effects that
aggressive rate shopping or the normal mortgage process can have
on a mortgage applicant. In the new Beacon version, the deduping
process has been expanded beyond seven days. One variable counts
the number of days within 365 days of scoring. If there has not
been an inquiry, the deduping mechanism is not activated. If there
is a consumer originated inquiry within the past 365 days from
mortgage or auto related industries, these inquiries are ignored
for the first 30 calendar days from scoring; then, multiple
inquiries within the next 14 days are counted as one. Each inquiry
will still appear on the credit report.
Scores should not change significantly because the variable in
the model using inquiries contributes less than 5% of the
predictive power of the model. According to Equifax statisticians,
an average of 5% of the credit reports in the Equifax consumer
credit reporting database (over 200 million consumer files) will
see a change in score due to this. Fewer than 5% of those will see
a change significant enough to effect a loan decision.
In order to get a score a borrower must have the following
conditions in his/her file:
- No "Deceased" indicator on the credit file
- At least one undisputed trade line that has been updated in
the last six months
- One trade line open at least six months
Scores range from 350 (high risk) to 950 (low risk). A
scorecard of 660 will be 660 on Beacon 96, Empirica and Experian/FICO
if the data on each file is the same. However, each repository is
likely to contain different data.
Every score is accompanied by a maximum of four reason codes.
Reason codes identify the most significant reason that a consumer
did not score higher. They are not red flags. Consumers with
scores in the 800 range get reason codes just as consumers with
scores in the 500 range. The reason codes may be used in
describing to the consumer the reason for adverse action. Scores
are not part of the credit file and are not covered by the Fair
Credit Reporting Act. Scores, if disclosed to the consumer, must
be related to the credit file - using the reason codes - since the
score has no meaning in itself; the meaning or risk level is
assigned by the lender and the investor.
When applicants have erroneous information reported, document
the inaccuracies. The easiest way to do that is to have your
credit-reporting agency upgrade the merged in-file to an edited
mid-range report or to a Residential Mortgage Credit Report. With
the upgraded report, you can ignore the score! The
file will have to be handled in a traditional manner for
underwriting and investment purposes. The developed report will
provide the paper trail that investors want. |
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