Professional Mortgage Lender in Utah - Justin Basso

The Basics of Credit Scoring

Today, we are going to be centering on the basics of an increasingly important portion of a buyer’s mortgage application – the credit score.

First, the 3 major national credit bureaus are: Experian (XP), Transunion (TU), and Equifax (EF)….But better terms to describe their function are:

1. Repository – they are huge “holders” of data; information about you and millions of other people.
2. Credit Reporting Agency (CRA) – these “repositories” get their data when creditors and courthouses “report” to them; and when you pull someone’s credit report, they in turn “report” that data to the entity that requested the information.

Credit Scores (in general)

1. What is a Credit Score?  It’s a number that, at a glance, helps lenders determine how likely you are to make your proposed payments on time.
2. How is it generated?  A score is only created when you pull someone’s credit file, and all the data retrieved is fed through a complex mathematical formula.  As a person’s data at the repositories changes, their score would change also….positively or negatively.
3. Why are scores different?  Fair Isaac Corporation (FICO) created the mathematical formulas that generate the score, BUT….

• There are different score formulas depending on what you are applying for….a mortgage, credit card, auto loan, insurance, or even if you are not applying for anything at all and get a “consumer” score directly from one of many websites that advertise “scores” these days.
• Fair Isaac sold their original formulas to XP, TU, and EF, which in turn, slightly altered them based on their own studies and analysis.
• The 3 bureaus typically don’t have the exact same data on a consumer.  So, if the data is different or has changed, the scores will also be different.

The FICO score on your mortgage credit report – The score range is 300-850.

What makes up the score? (The info below is from www.myfico.com).

1.    35% of the score is based on Payment History

a.    Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
b.    Presence of adverse public records (bankruptcy, foreclosure, judgments, suits, liens, wage attachments, etc.) collection items, and/or delinquency (past due items).
c.    Severity of delinquency (how long past due).
d.    Amount past due on delinquent accounts or collection items.
e.    Time since (recentness of) past due items (delinquency), adverse public records (if any).
f.     Number of past due items on file.
g.    Number of accounts paid as agreed

2.    30% of the score is based on the Amounts Owed

a.    Amount owing on accounts.
b.    Amount owing on specific types of accounts.
c.    Lack of a specific type of balance, in some cases.
d.    Number of accounts with balances.
e.    Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts), often referred to a Percentage of Usage.
f.    Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans).

3.    15% of the score is based on the Length of Credit History

a.    Time since accounts opened.
b.    Time since accounts opened, by specific type of account.
c.    Time since account activity.

4.    10% of the score is based New Credit and Inquiries

a.    Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account.
b.    Number of recent credit inquiries.
c.    Time since recent account opening(s), by type of account.
d.    Time since credit inquiry(s).
e.    Re-establishment of positive credit history following past payment problems.

5.    10% of the score is based on the Types of Credit Used

a.    Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.).

Special Note About Inquiries

This is always a hot topic because borrowers think they will hurt their score because their credit report is pulled.  But as explained above, New Credit only accounts for 10% of a person’s score, and of that, inquiries is only a part.  Also, keep in mind what an inquiry represents – application for additional credit.  If your credit report and score shows that you are a responsible borrower, then applying for more credit will have a minimal affect on your score.  But if you appear to be an irresponsible borrower, then the inquiry may drop your score a few points, or several points.

Note what Fair Isaac itself says about inquiries at www.myfico.com:

1. “For many people, one additional credit inquiry (voluntary and initiated by an application for credit) may not affect their FICO score at all.  For most people, a credit inquiry will only decrease their FICO score by a few points.”
2. “Looking for a mortgage or an auto loan may cause multiple lenders to request your credit report, even though you’re only looking for one loan.  To compensate for this, the score ignores all mortgage and auto inquiries made in the 30 days prior to scoring.  So if you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping.”

Thank you KCM.

Insider Secrets To An Optimal Credit Score

As you prepare to apply for credit (like a home mortgage) understand that it is significantly better to have your best possible credit profile BEFORE applying.  Working to improve your score during the mortgage process can be done, but there are two problems.  One, time to clear up items can become an obstacle when compared the time you are anticipating a closing.  And two, lower scores upfront can give an underwriter an additional reason to be uncomfortable with a file.  “Sooner, rather than later” should be the mantra of credit score improvements.  Here are some tested ways to do it:

Credit Cards – Revolving Debt proportions

1. Look on the credit report for revolving debt (not installment loans, or “open” accounts)
2. As a general rule of thumb, the balance should be no more than 30% of the credit limit.  So, if it’s more than that, have you should make every attempt to pay it down.
3. If there are many revolving accounts with high balances, you will most probably need to pay down most or all of them for the best score.
4. If there is nothing derogatory on the credit report, just high balances on revolving debt, you can often improve the score significantly.  But, if there are many derogatory items on the credit report, paying down revolving debt may not help the score very much.
5. Many lender have software programs that can quickly determining for you which (if any) revolving accounts need to be paid down, and to what balance.

Collections/Judgments:

1. Paying off or satisfying such a derogatory account does not normally improve the score because the derogatory account still exists, and so still hurts the score.  In fact, paying off an old collection may even make the score drop.
2. However, for collections, the borrower can ask for the account to be completely removed or deleted.  If you have not yet paid the collection, you can use that as a bargaining chip.
3. If there are many collection accounts, removing just 1 or 2 may not do much good.  You always need to look at the overall credit picture.
4. Charge-off accounts behave a little differently than collections.  You can sometimes gain points by paying those off.
5. Your lender likely has a What-if Simulator to experimentally see what affect removing an account has on the score.

Late Dates

1. When you look at the overall credit report and you see LOTS of late dates, especially ones from within the last year, there is not much you can do to help the score…those lates simply need to drift into the past.
2. However, if you just see 1 recent late date on 1 account, and just 1 other recent late date on another account, you should call those creditors and ask…beg…for those single late dates to be removed as a courtesy.  It may also be that the late dates were a mistake, but don’t push the creditor to admit to making an error.  Just ask them to remove it as a courtesy since you have an otherwise perfect payment history with that creditor.
3. Your lender can use the What-if-Simulator to experimentally see what affect removing a late date has on the score.

Authorized User Accounts-removing or adding

1. Piggybacking on someone else’s account can help or hurt your score.
2. If that account has recent late dates, you can most probably improve the score by having the actual account holder remove you as a user.
3. If the account is a revolving credit card and it’s “maxed out,” you might also improve the score by removing it, but only if you will still have other revolving credit cards on your report.
4. What about adding someone as an authorized user to a credit card?  This may help, but the better course of action is to get the actual card holder to make it a joint account with you.  This guarantees that the account will show up on the credit report within a month or two.  But be careful…the account should have a lot of history, no late dates, high credit limit, and low balance.

Other things to help

1. Keep old revolving credit cards open…don’t close them.
2. Regularly check your credit report to catch errors early.  You get a free one each year from each bureau. Don’t do all 3 bureaus at the same time…space it out throughout the year.

While I trust that some of your questions were answered in this blog, I bet many questions were also raised about your individual circumstance.  Credit Score Optimization is one of the central reasons why you should engage the expertise of a good loan officer right NOW.

Thank you KCM

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CREDIT FICO REBOUND

Many of these are obvious, yet people continue to ignore them.

1. Make Sure that each Creditor Reports to the Credit Bureaus
2. Add Your Name to Someone Else’s Good Account
3. Get Credit Advice from a Professional
4. Do Not Max Out any Credit Cards
5. Pay All your Bills on Time Every Time
6. Get Current on Past Due Accounts
7. Immediately Settle Disputed Accounts
8. Do Not Close Unused Credit Accounts
9. Do Not Make Too Many Credit Inquiries
10. Reduce Revolving Your Debts
11. Never File For Bankruptcy
12. Dispute Delinquent Credit Accounts
13. Correct Credit Report Inaccuracies
14. Get a Secured Credit Card
15. Open New Credit Accounts with High Limits
16. Close Accounts Slowly, Starting with the Newest
17. Get a Savings or Checking Account
18. Quickly Dissolve Joint Accounts after a Divorce
19. Avoid Consolidating Debts or Balance Transfers
20. Negotiate Better Terms with Creditors
21. Stop Using Credit Cards
22. Ask for a Credit Limit Increase, But Not Too Often
23. Never Take a Cash Advance
24. Occasionally Use Your Credit Cards
25. Pay Utility Bills on Time
26. Maintain at Least One Good Account
27. Something is Better than Nothing
28. Shop for Loans within a Short Period
29. Live Within Your Financial Means
30. Apply for an Auto Loan
31. Don’t Open Too Many Accounts within a Short Period
32 Add Information to Your Credit Report
33. Payoff Existing Loans
34. Pay More than the Minimum Payment
35. Ask Creditor to Delete a 30-Day Late Item
36. Enroll for Automatic Bill Paying Services
37. Resist the “In-Store Credit” Temptation
38. Pay Credit Cards Early
39. Do Not Exceed Your Credit Limit
40. Pay Balances Off in Full
41. Avoid Finance Companies
42. Re-Open Closed Accounts
43. Lower Your Overall Debt Ratio And Increase Your Assets
44. Have at Least Three Open Accounts At Any One Time
45. Do Not Apply for a “Capital One” Credit Card
46. Prioritize Your Debts
47. Always Know Your Credit Score