About Credit

Credit Scores:

If you’re like most people, you have a general idea of what they are but you don’t really understand how they work or how they affect you – especially when you’re applying for a mortgage. Credit scores were introduced in the late 1990’s as a way to make interpreting credit reports less subjective. In addition, new technology was being introduced in the mortgage industry which was automating the underwriting process so that underwriting decisions could be applied more uniformly. A company called “Fair Isaac Co.” developed a method of “scoring” a credit report to determine the probability of default based on past history. These credit scores are known as “FICO” scores. If you are applying for a mortgage, your currentmedian credit score will determine not only which type of mortgage you are eligible for but what “pricing tier” you will qualify for. Generally speaking, the higher your credit scores, the lower your interest rate will be. Scores range from a low of 300 to a high of 850.

When your loan officer pulls your credit report he/she will tell you what your credit scores are. You will receive three scores – one from each of the main credit “repositories” – TransUnion, Equifax, and Experian. Regardless of what kind of a loan you are applying for, most investors currently require a minimum median credit score of 640.

Although there are over 40 “Factor Codes” that determine a credit score, there are 5 main categories that have the most influence:

Past Payment Performance (35%)
Credit Utilization (30%)
Credit History (15%)
Type of Credit in Use (10%)
Inquiries (10%)

Past Payment Performance:

Nothing can have a more positive impact on credit scores than making payments on time, period. The more time that has elapsed after a late payment has been made, the lower the impact to the credit score will be.

Credit Utilization:

If you have credit but don’t use it your credit scores will most likely not be as high as they could. For mortgage purposes we like to see that you have a minimum of 3 -5 revolving credit cards that have been open for at least 24 months. It’s a good idea to use each of them at least once in a while. Charge something and pay off the card at the end of the month or keep a very low balance.

Credit History:

How long have you had your accounts? Your oldest accounts are the most valuable. If you have an old account, don’t close it! Leave it open and use it occasionally. If you know you will be applying for a mortgage, use the card a month before your credit report is pulled. Keep a very low balance on it. (Like around $80.00.)

Type of Credit in Use:

“Finance Companies” have a negative impact on credit scores. Don’t apply for credit from any source that says “Finance” or “Finance Company” after their name. The reason for this is that based on the predictability analysis of millions of sample files, people who use finance companies are more likely to have 90 day late payments than any other type of credit accounts. Other types of credit would be mortgages, cars, revolving or installment accounts. Always make it a priority to make all your payments on time – but especially mortgages, cars and student loans.

Inquiries:

Every time you allow someone to pull your credit report it has an impact on your credit score. If you have too many inquiries it can make the difference between getting a mortgage and not getting a mortgage. If you are thinking about applying for a mortgage don’t open up any new accounts unless it is absolutely necessary. If you have a loan in process it’s important to not allow anyone other than your loan officer to pull your credit until after your loan has closed. (Most insurance companies will require a credit check before they will extend coverage on your new home. This is considered to be a “soft pull” and will not affect your credit score.) Mortgage companies are required to re-pull your credit within 48 hours of closing. All debts must be similar to what they were at time of application or loan approval can be revoked. Any new inquiries must be addressed.

Helpful Hints for Better Scores:

Don’t “max out” your credit cards. As a general rule, don’t keep a balance that is more than 35% of your credit limit if you want the best scores. A very small balance is usually better than a zero balance.
Don’t close any accounts until you get sound professional advice! We have tools that we can use to determine what you need to do to improve your score.
Don’t apply for any credit that you don’t really need.
Always pay your bills on time. Always.
Don’t dispute! One of the worst things a person can do these days is to formally “dispute” an account on a credit report. If you disagree with a creditor about an account, do everything you can to resolve the issue – even if it means paying off the account. Any disputed accounts on a report will have to be resolved before you can get loan approval.
If you ever pay off a collection account or judgment, make sure you keep a copy of the receipt of payment. Forever. You will probably need it in the future.

Facts About Your Credit:

According to My Fico website, when you are shopping for a mortgage, multiple inquiries from mortgage companies within a 30 day period will have little effect on your credit scores.
A divorce decree does not supersede an original contract with a creditor and does not release one from legal responsibility to repay any accounts. You must contact each creditor individually and seek their legally binding release of your obligation. Only after you have that release can your credit history be updated accordingly.
Payment in full does not remove your payment history. Accounts paid as agreed remain on your report for up to 10 years.
Accounts not paid as agreed remain for 7 years as measured from the date in your credit file shown as “date of last activity”.
Collection accounts remain for 7 years from “date of last activity”.
Courthouse Records (Liens/Judgments) remain for 7 years from the date filed, with the following exceptions:
1. Bankruptcy – chapters 7 and 11 remain 10 years from the date filed. (Credit accounts remain 7 years from the date of last activity.)
2. Bankruptcy – Chapters 13 non-dismissed or non-discharged remain 10 years from the date filed.
3. Unpaid tax liens remain indefinitely.
4. Paid tax liens remain for up to 7 years from the date released.

Reality is that everyone wants to have perfect credit but very few people do. Nothing can take the place of getting expert advice from a knowledgeable loan officer. If you are thinking about buying or refinancing a home in the near future or even a year from now, it may not be a bad idea to have your credit checked by your loan officer now so that he/she can troubleshoot any potential problems while you still have time to correct them. We’re here to help!