Credit scores are more important than ever as lenders introduced higher standards for borrowers seeking a mortgage.
Most lenders require credit score above 720 for conventional loans. FHA loans did not take credit scores into account in the past, as long as the borrower had a stable employment history and income over the last two years prior to seeking mortgage. However, in the 2009 financial landscape, even FHA loans require at least 620 credit score.
Borrowers with lower than perfect credit scores are punished by higher interest rate they must pay on their mortgage.
This is why it is important for borrowers to check their credit rating and remove any errors on credit reports BEFORE applying for a mortgage.
Consumers can obtain a copy of their credit report and review it for accuracy. Everyone is entitled to one free credit report per year from two of the three credit bureaus: Equifax, and TransUnion – credit score itself will not be included in the free credit report, however an option is offered to purchase the score along with the report.
As of February 14, 2009, Experian no longer offers credit scores via MyFICO.com, but FICO scores based on data from Equifax and TransUnion will still be available through the Web site. The change doesn’t affect lenders, but it makes it more difficult for potential borrowers to examine their score before they apply for a loan.
Borrowers must remember though that lenders will use different credit score for the mortgage than the consumer credit score they see on the report – the consumer credit score is deceivingly higher and therefore vigilance in keeping the score as high as possible is advised.
In order to correct any errors on the reports, borrowers should look for:
- Late payments. There should be no late payments over seven years old on the report. This is important, as approximately 35 percent of a credit score is based on timely payments.
- Collections. The report shouldn’t show any collections or charge-offs more than seven years old. It’s a good idea for consumers to save copies of their credit report for seven years so they have proof of when an item was added.
- Payment records. All paid-in-full installment loans and all collections that have been paid in full or settled for less than the amount due should show a zero balance. Sometimes collections are not updated after they’ve been paid or settled.
- Mysterious accounts. Consumers should be able to recognize all accounts listed on the report. Incorrect accounts do sometimes appear, either by mistaken identity or by identity theft. Consumers should contact the creditor immediately to compare their name and Social Security number with the one shown for the incorrect amount. In the case of an incorrect collection, consumers may have to request a “validation of debt,” or what is sometimes called a “media packet,” which provides details on the account holder. If the account is a case of identity theft, the consumer should request a fraud affidavit from the creditor. It’s also a smart idea to file a police report.
- Original dates. Length of credit history is 15 percent of a credit score, so consumers should be sure the original dates they opened their accounts are accurate. Original account dates could be reported inaccurately if a credit card company is acquired or merged, or if a credit card is reported lost or stolen.
- Available credit. Credit limits on the credit report should match up with credit card statements. It’s best to keep balances under 50 percent of the available limit; less than 30 percent is even better. Debt accounts for 30 percent of your score.
- Types of accounts. Sometimes accounts are not categorized correctly. A home equity line of credit should be listed as a second mortgage, not just a line of credit. If the account type is not reflected properly, consumers should contact the creditor. It is important to various types of credit (not just credit cards).
- Reason codes. Consumers should read what the credit bureau has to say about why their score is what it is. These so-called “reason codes” appear in the credit report to explain what factors played into the credit score and what actions can be taken to improve the score over time. One caveat: If a consumer already has a good credit score, ignore the reason codes, as making changes could actually result in a lower score.
MyFICO credit scores are calculated as follows:
One last word of advice for consumers: Contrary to popular belief, think twice before closing credit cards, which shrinks the available line of credit listed on your report and hurts the credit utilization ratio. However, do not open too many credit cards either as this may increase the risk factor.
The key to good credit is paying bills on time and being proactive in reviewing credit reports regularly for potential errors. If consumers find their credit score is a respectable 720 or higher, removing minor errors may not be worth the effort. Otherwise, finding and eliminating major errors is one way to get the high credit rating mortgage borrowers deserve.
NOTE: For details always contact your trusted Lender
NOTE: All information presented here is believed to be accurate but is subject to errors and omissions and should not be relied upon without verification.
SOURCE: MyFICO, Experian, Equifax, TransUnion, REALTOR Magazine
REALTOR, ASP, ABR
KELLER WILLIAMS REALTY
Leesburg, VA 20176