Mortgages
and Credit Reports
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.
Credit
Guide 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: 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 weeks.
- 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 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.
How
to Correct Errors
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. |
