Credit Scoring

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:

1.     Past delinquencies.

2.     Derogatory payment behavior.

3.     Current debt level.

4.     Length of credit history.

5.     Types of credit.

6.     Number of inquiries.

       Weather you are a first-time home buyer or you are planning to refinance your existing home loan, it is important to understand how your credit history influences the process. When you are being considered for a loan, the lender looks at your past payment history, the amount of credit you have outstanding and the amount of credit you have available—a snapshot of you as a borrower.

Mortgage lenders rely either on a consumer’s credit score, such as a FICO score developed by Fair, Isaacs & Company, or use a combination of FICO score and other factors to price a loan. Credit bureau information is used to obtain a number that represents how likely you are to make your loan payments on time. FICO scores range from approximately 250 to 900 and in general, higher scores predicts timely mortgage payments.

Your credit history directly affects the interest rate and fees (or points) a lender charges. Consumers with the best credit generally pay the lowest amount for a home loan. Building and maintaining strong scores may be as simple as improving your credit profile. Recommendations for doing so include:

• Making timely payments each month—the best way to increase a credit score is to pay bills on time.
• Paying off outstanding debt and limiting the amount of credit you use—lowering balances on credit cards and lines, and keeping them low, raises a credit score.
• Requesting a lower credit limit on current credit cards to avoid high credit limits—High credit limits relative to income can adversely affect a score.
• Closing credit accounts limits the number of credit lines—an obligation to pay multiple accounts lowers a credit score. By consolidating debt onto two or three credit lines and canceling other accounts, scores can be raised.
• Checking credit reports periodically—incorrect credit information in a credit bureau file may lower a credit score. The three major bureaus who provide reports for a small fee are Equifax (800-405-0081), Experian (800-682-7654), and TransUnion (800-888-4213).
• Not applying for credit you don't need—whenever you apply for credit, the creditor will obtain a credit report from one or more of the three credit bureaus. Each such inquiry stays on your record and affects your score. This is because each inquiry suggests that you are increasing the amount of credit available to you.

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 the prominent secondary market sources FNMA (Fannie Mae) or FHLMC (Freddie Mac). Borrowers may also find the loan terms and conditions less attractive than the "A".  This would be A- thru D loans called sub prime lending.  It may take some time before a suitable funding source is located to support a buyer's needs.

Interest rates are reasonable these days, and homeownership has become more affordable thanks to a strong economy. Whether you are homeowners moving up into larger residences, or first-time home buyers, your credit history is a key component in your success.

In making a loan decision, mortgage lenders closely review an applicant's credit history for late payments -- fewer blemishes on a credit report increase the likelihood of approval. Being late on a house payment, credit card payment or other obligations will be reflected negatively on a credit report. A pattern or history of late payments or delinquent accounts is generally regarded as a "red flag" and may require an explanation, or may result in denial of the loan.

Many people don't realize that building and maintaining good credit is essential throughout their lifetimes. Good habits to keep a good credit profile include:

- Paying bills on time each month. This shows the consumer knows how to manage credit. Paying off outstanding debt and limiting the amount of credit used are good practices.

- Requesting a lower credit limit. Consumers shouldn’t extend their credit limit above their income, no matter how many tempting solicitations they receive.

- Closing credit accounts. It’s a good idea to consolidate debt and cancel other unnecessary accounts whenever possible. It shows responsible credit management.

- Being proactive, not reactive. Consumers who are unable to meet their payment obligations should contact their creditors and work out a payment plan as soon as possible. The nonprofit Consumer Credit Counseling Service (800-388-2227) can help in resolving credit issues.

Building and keeping good credit and managing it well is a major part of homeownership, which in turn drives much of the local economy. As a real estate professional, you are in a unique position to help your clients, potential clients and the community-at-large in understanding the lifelong importance of their credit histories. The next time you have the opportunity to coach someone about the value of healthy credit, share these worthwhile ideas. They can help everyone’s business.

The higher you credit score, the lower the interest rate you can qualify for will be.  There are a few lesser known facts that could help you boost you credit scores.

Ask for a DO OVER :

If you have a smudge on your credit rating from one or two late payments, call the creditor and ask them to delete the late payment from your record.  A single late payment can lower you score by as much as 100 points.  If the late payment has not been a habit, they are likely to do it.

Know the right lender:

Ask a prospective lender if it has access to " rapid re-scoring."  It means an error can be wiped out in as little as 24-48 hours instead of the normal month or more.  Thus qualifying you to a lower interest rate.

In most states you can now get your credit reports free once a year.  In this era of identity fraud it is important to keep on top.  You could order one from each credit agency every four months.  To find out when your state qualifies for a free report or to order one log onto :

www.annualcreditreport.com

These ideas came from the book The ABC'S of getting out of debt by Garrett Sutton 

DON'T GET "PRE-QUALIFIED”!

Do you want to get the best house you can for the least amount of money? Then make sure you are in the strongest negotiating position possible. Price is only one bargaining chip in the negotiations, and not necessarily the most important one. Often other terms, such as the strength of the buyer or the length of escrow, are critical to a seller.

In years past, I always recommended that buyers get "pre- qualified" by a lender. This means that you spend a few minutes on the phone with a lender who asks you a few questions. Based on the answers, the lender pronounces you "pre-qualified" and issues a certificate that you can show to a seller.  Sellers are aware that such certificates are WORTHLESS, and here's why! None of the information has been verified! Oftentimes unknown problems surface!

Some of the problems I've seen include recorded judgments, child support payments due, glitches on the credit report due to any number of reasons both accurately and inaccurately, down payments that have not been in the client's bank account long enough, etc. So the way to make a strong offer today is to get "pre-approved".

This happens AFTER all information has been checked and verified. You are actually APPROVED for the loan and the only loose end is the appraisal on the property. This process takes anywhere from a few days to a few weeks depending on your situation. It's VERY POWERFUL and a weapon I recommend all my clients have in their negotiating arsenal.

Identity theft has become a sad reality.  I am working with a client now who had her identity stolen.   Being the person she is, she went to work on it right away.  She hired a lawyer who assured her he would take care of it.  She gave him a hefty retainer and had been making monthly payments to him.  A few months later thinking that it had all been taken care of we went in search of her perfect townhouse.  We found a perfect place and we placed an offer.  Later that afternoon she called me in tears.  Her lender had informed her the lawyer had done NOTHING.  (why didn't the lender know that before?  HMMM thats another story.)  So for the last 6 months we have still been trying to get her credit reports straightened out.  Moral of the story??  Be very vigilante about watching you credit.  Get your free report once a year or there is insurance you can buy now to protect you.