Credit

Nothing has a greater impact on your ability to obtain a mortgage loan than your credit rating. How much you can borrow, what rates you are offered, and how many choices you have will all be determined in one way or another by your credit report. Understanding your credit report is the very first step in making the right loan choice.

In this section, you will learn what a credit profile is and how to correct errors in your credit score.

Your Credit Profile Explained

A credit profile refers to a consumer credit file, which is made up of various consumer credit reporting agencies. It is a picture of how you (as an individual) paid back the companies you have borrowed money from or how you have met other financial obligations.
There are usually five categories of information on a credit profile:

  • Identifying Information
  • Employment Information
  • Credit Information
  • Public Record Information
  • Credit Inquiries

Your Credit Score Explained

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, and 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 will have a good chance to obtain a lower rate of interest and close their loan without any delays.
  • 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 scoring range may allow borrowers to obtain “A” pricing, but loan closing may still take several days or 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 (Fannie Mae) and FHLMC (Freddie Mac). 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 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.