UNDERSTAND YOUR CREDIT REPORT
AND
CLEAN UP ERRORS

If you're thinking about buying a house, your credit score is a very important number. The interest rate you'll pay for the money you borrow will be determined, in large part, by this three-digit number that's generated from the information in your credit report.

FICO SCORE

In today's increasingly automated society, it should come as no surprise that when you apply for a mortgage, your ability to pay can be reduced to a single number. All the years you've been paying your mortgage, car payments, and credit card bills can be analyzed, sliced, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

All three of the major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. The best known is called the FICO score, based on a model developed by Fair Isaac and Company (hence the name) and used by Experian. Equifax's model is called BEACON, while TransUnion uses EMPIRICA. While each of the models considers a range of data available in your credit report, the primary factors are:

• Credit History:   How long have you had credit?
• Payment History:   Do you pay your bills on time?
• Credit Card Balances:   How much do you owe on how many accounts?
• Credit Card Limits:  What percentage of your credit limit has been charged against?
• Credit Inquiries:   How many times have you had your credit checked?

Each of these, and other items, are assigned a value and a weight. The results are added up and distilled into a single number. FICO scores range from 300 to 800, with higher being better. Typical home buyers likely find their scores falling between 600 and 800.

Most people applying for a home mortgage need not 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 before you apply for your mortgage. That way, you can take steps to correct any negatives before making your application. 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 paid back the companies you have borrowed money from, or how you have met other financial obligations. There are five categories of information on a credit profile:

1. Identifying Information
2. Employment Information
3. Credit Information
4. Public Record Information
5. Inquiry

NOT included on your credit profile are race, religion, health, driving record, criminal record, political preference, or income. If you have had credit problems, be prepared to discuss them honestly with a mortgage professional who will assist you in writing your Letter of Explanation. Knowledgeable mortgage professionals know there can be legitimate reasons for credit problems, such as unemployment, illness or other financial difficulties. If you had problems that have been corrected (reestablishment of credit), and your payments have been on time for a year or more, your credit may be considered satisfactory. The mortgage industry tends to create its own language and credit rating is no different.

Credit Score mortgage lending gets its name from the grading of one's credit based on such things as payment history, amount of debt payments, bankruptcies, equity position, credit scores, etc. Credit scoring is a statistical method of assessing the credit risk of a mortgage application. The score looks at the following items: past delinquencies, derogatory payment behavior, current debt levels, length of credit history, types of credit and number of inquires. By now, most people have heard of credit scoring. The most common score (now the most common terminology for credit scoring) is called the FICO score. This score was developed by Fair, Isaac & Company, Inc. for the three main credit Bureaus; Equifax (Beacon), Experian (formerly TRW), and Empirica (TransUnion). FICO scores 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 down payment amount.

Credit scores are based on five factors:

1. 35% of the score is based on payment history
2. 30% of the score is based on the amount owed
3. 15% of the score is based on how long you’ve had credit
4. 10% of the score is based on new credit being sought
5. 10% of the score is based on the types of credit you have

The scores are useful in directing applications to specific loan programs and to set levels of underwriting such as Streamline, Traditional or Second Review, but are not the final word regarding the type of program you will qualify for or your interest rate. 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 for the past few years (since 1999); however, the FICO scores have been used since the late 1950's by retail merchants, credit card companies, insurance companies and banks for consumer lending. The data from large scoring projects, such as large mortgage portfolios, demonstrate their predictive quality and that the scores do work.

The following items are some of the ways that you can improve your credit score:

• Pay your bills on time
• Keep Balances low on credit cards
• Limit your credit accounts to what you really need.
• Accounts that are no longer needed should be formally cancelled since zero balance accounts can still count against you
• Check that your credit report information is accurate
• Be conservative in applying for credit and make sure that your credit is only checked when necessary

Credit Scores determine the time it will take to process a loan and the level of interest rates that may be obtainable:

• A borrower with a score of 680 and above is considered an A+ borrower. A loan with this score will be put through an automated basic computerized underwriting system and be completed within minutes. Borrowers in this category qualify for the lowest interest rates and their loan can close in a couple of days. 
• A Credit Score below 680 but above 640 may indicate underwriters will take a closer look in determining potential risk. Supplemental documentation may be required before final approval. Borrowers with this credit score may still obtain A pricing, but the loan may take longer to close and require additional documentation.
• Borrowers with credit scores below 620 are normally locked into the best rate and terms offered. This loan type usually goes to sub-prime lenders. The loan terms and conditions are less attractive with these loan types and more time is needed to find the borrower the best rates.

All things being equal, 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. Various combinations are allowed when determining your grade, but the worst-case scenario will push your grade to a lower credit grade. Late mortgage payments and Bankruptcies/ Foreclosures are the most important. Credit patterns, such as a high number of recent inquiries or more than a few outstanding loans, may signal a problem. Since an indication of a willingness to pay is important, several late payments in the same time period are better than random lates.