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Mortgages and Credit Reports
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.
- ABC's of Mortgage Credit
ABC Mortgage lending gets its name from the grading of credit based on such things
such as payment history, account balances, bankruptcies, equity position, and
credit scores.
Shown below is a guide to help you estimate your credit grade;many companies have
exceptions that may result stricter or more lenient guidelines.
| A General Guide to Credit Grades |
| |
Credit
Score |
Debt
Ratio |
Max
LTV |
Mortgage |
Revolve |
Install |
| |
30 |
60 |
90 |
30 |
60 |
90 |
30 |
60 |
90 |
| A+ |
670 |
36 |
95 |
0 |
0 |
0 |
2 |
0 |
0 |
1 |
0 |
0 |
| A- |
660 |
45 |
95 |
1 |
0 |
0 |
3 |
1 |
0 |
2 |
0 |
0 |
| B |
620 |
50 |
85 |
2 |
1 |
0 |
4 |
2 |
1 |
3 |
1 |
0 |
| C |
580 |
55 |
75 |
4 |
2 |
1 |
6 |
5 |
2 |
5 |
4 |
1 |
| D |
550 |
60 |
70 |
5 |
3 |
2 |
8 |
8 |
4 |
7 |
6 |
2 |
| E |
520 |
65 |
60 |
6 |
4 |
3 |
10 |
10 |
6 |
10 |
8 |
3 |
- Bankruptcy/Foreclosure
- A+ None Allowed Within 10 years
- A- Minimum 2 Years, Re-Established Credit
- B Minimum 2 Years, Some Lates
- C Minimum 1 Year
- D Discharged
- E Possible Current
The figures shown here are estimates. When trying to figure a credit grade, keep
in mind the following principles:
- When your 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.
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,
number of inquiries.
Credit scoring will place borrowers in one of three general categories.
- First, 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.
- Second, a score below 680 but above 620 will probably indicate that underwriters
will take a closer look at the file to determining 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.
- Third, 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.
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 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 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.
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
What is NOT included on a credit profile:
- Race
- Religion
- Health
- Driving record
- Criminal record
- Political preference
- Income
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.
It also specifically defines who can access the information in a credit profile,
and how notifiication of this activity is made.
The Fair Credit Reporting Act (FCRA) outlines specifically who can see a credit
profile. Businesses must have a "legitimate business need," and a "permissible
purpose," as stated in the federal law to obtain a credit file. Otherwise,
only you those who you give written permission can access your credit files. Neighbors,
friends, co-workers, and family members cannot have access to a credit profile
unless it is authorized. Examples of those who can access a 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.
Credit Questions & Answers
Why do we need credit reporting? Reporting is needed because it 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 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? 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 andprompt payments.
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