YOUR CREDIT REPORT

A lender generates a credit report called a “tri-merge” report that pulls information from the three main credit bureaus:

• Experian
• Transunion
• Equifax

Every home loan requires a borrower meet a certain minimum credit score.  A tri-merge credit report gives a mortgage lender one credit score for each of the three bureaus (unless a loan applicant does not have enough credit history to generate a score for each bureau).

WHAT CREDIT SCORE DOES YOUR LENDER USE?

Mortgage Lenders use the middle of the 3 credit scores to determine whether or not a home loan applicant meets minimum credit score requirements. If an applicant only has two scores the lower of the two scores is used for loan approval.

For example, if a borrower has these scores – 667, 739, 702 the lender would use the 702 as the effective loan score.

More than just a number

A mortgage lender analyzes a home loan applicants credit for more than just a score. The following are all also reviewed by a lender and can significantly impact a borrower’s approval:

• Late payments/payment performance
• Bankruptcies
• Judgments
• Liens
• Short Sales
• Foreclosures
• Loan Modifications
• Collection Accounts
• Accounts showing that an applicant has filed a dispute relative to a trade line
• The length of time an applicant has had and established credit
• The number of trade lines an applicant has
• The amount of monthly debt an applicant has

Each of the items listed above plays an important role in an applicant’s ability to obtain mortgage approval.  If you have any questions regarding credit and how to maximize your score, feel free to contact me. I am alway's here to help.

All too often credit related issues are missed up front when a borrower applies for a mortgage. This can be very costly.  If a client pushes forward with a home purchase or a refinance based on an insufficient credit analysis they could spend money on items such as appraisals and/or home inspections.

Credit Scores and Mortgage Interest Rates

Mortgage lenders use a credit score tier system in order to determine interest rate (other factors such as occupancy also factor into interest rate received). Additionally, mortgage insurance products also factor in credit score.   The most common tier system is based on 20 point increments and looks like this:

Conventional Home Loan Credit / Rate Tiers

600 to 619      Highest Rates
620 to 639
640 to 659
660 to 679 
680 to 699
700 to 719
720 to 739
740+              Lowest Rates

VA and FHA Home Loan Credit / Rate Tiers

580 to 600   Highest Rates
600 to 619
620 to 639
640 to 659
660 to 679 
680 to 699
700+            Lowest Rates

JUMBO Home Loan Credit / Rate Tiers

660 to 679  Highest Rates
680 to 699
700 to 719
720 to 739
740 to 759
760+           Lowest Rates 

*some JUMBO lenders use a 780+ tier for Lowest Rates

 

How Credit Cards Impact Credit Scores

Credit cards impact credit scores in multiple ways. First, the age of a credit card account factors into your score. Typically the newer the account the less it helps your credit score. Second, credit card utilization matters. This simply refers to how much a consumer uses a credit card. After a period of no utilization the positive aspects of a credit card account are not included in ones credit score.

Third, the number of credit cards may impact your score. Consumers with a very high number of credit cards are often penalized. In addition, the payment history on a credit card weighs in heavily on your credit score.

Proportionate Balances Impact Credit Score

However, typically the biggest and most malleable impact from a credit card comes from it’s proportionate balance. In other words, how much you owe on a credit card compared to the high limit of that credit card has a large impact on your credit scores. Simply put, lower proportionate balances promote higher credit scores. You improve your Proportionate balance in 1 of 2 ways:

The reason lower proportionate balances result in higher credit scores is simple. In fact, there are 2 primary reasons for this idea:

• Consumers are “liquid”: in case of a cash emergency, the consumer has low balance credit cards to continue paying bills with
• Obligations are lower: lower credit card balances equal lower monthly debt for a consumer

Use Credit Cards to Boost Credit Scores

Often credit cards present the best opportunity to quickly improve credit scores. In fact, given the right factors making adjustments to credit cards can significantly increase one’s credit scores in a relatively short period of time. However, this is not always the case. Every consumer’s credit profile and opportunities differ. Commonly, the 2 following ideas can possibly help increase one’s credit scores:

• Paying down the balance
• Increasing the high limit

HOW A HARD INQUIRY IMPACTS YOUR CREDIT

Applying for a home loan means having your credit pulled.  Pulling a credit report results in  a “Hard Inquiry”. While hard inquiries may impact credit scores they also may not hurt your score.

What is a “Hard Inquiry”?

Hard inquiries help lenders determine whether consumer is a good credit risk.  It shows the creditor (ex: mortgage lender) the applicant’s credit score.  Also, lenders see each trade-line on the consumer’s credit.  A hard inquiry may impact a credit score.

Hard Inquiry Impact on a Credit Score

There is no one size fits all answer to this question.  Credit scores are complex. In fact, they are based on detailed algorithms. Hard inquiries indicates a creditor is considering approving a loan or credit line.  As a result, a credit score takes the hard inquiry into consideration.

For example, consider a person with an 820 credit score and a spotless credit history. A hard inquiry likely will not affect their credit score at all.   However, in contrast, a person with a 580 credit score may see their score drop 3-5 points from a hard inquiry.  This is the credit scoring systems way of letting other creditors know this person is possibly not a good credit risk.

Multiple Credit Inquiries Impact on Credit Score

Typically multiple inquires in the same industry in a short period of time will not dramatically impact a borrower’s credit score.  Click here for more on multiple credit inquiries. On the other hand, many inquiries across different industries may drop one’s credit score.

How Long do Credit Inquires Remain on Your Credit Report?

Credit inquiries are tracked for 24 months on a credit report. However, FICO credit score algorithms strongly factor inhard inquiries from the past 12 months into a credit score. In other words, while inquiries hang around for 2 years their impact lightens after 1 year.

Multiple Credit Inquiries Impact on Credit Score

Typically multiple inquires in the same industry in a short period of time will not dramatically impact a borrower’s credit score.  Click here for more on multiple credit inquiries. On the other hand, many inquiries across different industries may drop one’s credit score.

How Long do Credit Inquires Remain on Your Credit Report?

Credit inquiries are tracked for 24 months on a credit report. However, FICO credit score algorithms strongly factor inhard inquiries from the past 12 months into a credit score. In other words, while inquiries hang around for 2 years their impact lightens after 1 year.

 

 

HOW MULTIPLE INQUIRIES IMPACT YOUR CREDIT SCORE

Multiple credit inquires concern many prospective home buyers and homeowners. The impact of multiple credit inquiries all depends on when your credit is pulled and what type of credit report is pulled.

Different Hard Inquiry Types

First, the type of credit inquiry matters. In fact, 4 different types of credit reports exist. They are:

• Consumer - www.myfico
  
• Mortgage
• Credit Card
• Auto

A major factor related to multiple credit inquires impacting credit score is credit report type. Having multiple like kind credit report inquires and having multiple not like kind credit report inquires impacts credit score differently. In fact, the 2 generally have complete opposite effects on a consumer’s credit score.

Like Kind Inquiries Safety Window

Secondly, the timeframe between credit report inquiries matters. Most notably, timeframe between like kind credit report inquiries is important. As long as your multiple like kind credit report inquiries occurs within 45 days of the first credit report inquiry there should be no negative impact on your credit score. For example:

• A mortgage lender pulls your credit on January 1st
• Another mortgage lender pulls your credit again on February 10th of that same year (41 days later)
• Your credit scores should suffer due to the additional like kind credit report inquiry

Intermittent Data Changes to your Score

While your score should not be impacted directly by multiple like kind inquires within 45 days. However, data changes to your credit profile during that same 45 days can impact your scores outside of the inquiries. The 45 day timeframe only protects your scores against the impact of multiple like kind credit inquiries.

Your scores can change from report to report based on your payment and balance history changing.  For example, a missed payment between the 1st credit inquiry and the 2nd credit inquiry would likely lower your score due to the new and derogatory information.

CREDIT REPORT AND REASON CODES

Credit Reports contain negative comments even with credit scores in the upper 700 range. For example, “too many inquiries” is common. The critique comes in the form of a “Reason Code”.  

Reason Codes & What They Mean

Credit Reporting Agency’s such as Experian, Equifax and TransUnion must list reasons why your credit score is not perfect.  This has to be done according to the opens in a new windowFair Credit Reporting Act. Common Reason Code examples include:

• Age of accounts
• Ratio of balance to limit on revolving accounts too high
• Total balance of all accounts is too high
• Too many inquiries

Complete list of Reason Codes

What are Credit Report Reason Codes For?

Simply put, Reason Codes are guides.  The intent behind the law requiring credit report / credit score reason codes is good. Primarily, knowing why your score is not perfect allows you the chance to fix it.

In other words, seeing the reason code for “ratio of balance to limit on credit cards” helps. You know to focus on lowering that very ratio to boost your credit scores.

Leverage Reason Codes into a Higher Credit Score

Reason Codes appear in order of impact.  For example, codes listed first address what is impacting your credit score the most.  Conversely, Reason Codes listed last reveal what is impacting your credit score the least out of all listed Reason Codes listed.

Reason Codes tell you what to work on first in order to see the biggest increase to your credit score.  However, Reason Codes are general explanations.  In order to obtain detailed guidance, contact a credit professional.  

CREDIT REPORT ERRORS AND HOW TO GET THEM REMOVED

Errors appear on consumer credit reports regularly. Checking your credit at least once per year helps protect your credit.

Importance of Healthy Credit

Your credit report is a history of your credit activities. In fact, your credit report and credit score play a major role in many aspects of your life. A credit report incorporates a large amount of data and determines how creditworthy you are. For example, several items are factored into your credit:

• Timeliness of payments
• Debt balances
• Credit history and length
• Types of credit you have
• Legal items (bankruptcy or judgment)
• Number of inquiries into new debt

Home loan approval relies heavily on your credit report. As a result, annual credit report checks improve your ability to obtain a home loan in the future. After all, these checks allow you to proactively spot errors and correct them.

In fact, The federal Fair Credit Reporting Act (FCRA) requires credit reporting companies provide a free copy of your credit report once a year. You can learn more here – Annual Credit Report.

Review all 3 Major Bureaus

The FCRA regulates both credit reporting agencies (CRA) and the creditors supplying the information to them. Protecting consumers by ensuring privacy and accuracy is the goal. In addition, the 3 major credit bureaus provide services aimed at protecting your credit. Check out each below:

• Equifax
• Experian 
• TransUnion 

Reporting Errors on Your Credit Report

Errors on your credit report might impact the cost of a mortgage, auto loan, insurance policy and many other items. In addition, these errors may even keep you from getting approved for new credit.

However, consumers have a right to review their files and contest errors.  In fact, each credit reporting agency must investigate, respond and correct the error when appropriate. Thankfully, reporting an error on your credit report is easy today.

If you discover an error on your credit report it is important to:

• dispute the error in writing
• provide specific information (name, address and social security #, each item of dispute along with request for deletion or correction, and copies of support documents proving the error)
• keep a copy of each dispute letter and your supporting documents
• use certified mail, return receipt requested
• submit a dispute letter on each specific item to the creditor
• if an error is verified, the creditor must notify each credit reporting agency (bureau) of the changes to be made to your credit report

 

 TO FREEZE OR NOT TO FREEZE MY CREDIT?

Freezing a credit report recently surfaced a few years ago. Many people do not know they can put a “freeze” on their credit report. A credit freeze simply put, locks your credit for a period of time so no-one besides you can access it. If you place a freeze on your reports, you will have to verify your identity before a new account can be opened in your name. The good news is that the credit bureaus have made the process fairly easy through technology and mobile apps.

I have provided the links below to freeze or unfreeze your credit.

Equifax

Experian

Transunion

See your scores WITHOUT hurting your scores! Click Here >>>