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The
Truth about Your Credit Score... the Good, the Bad and the Ugly
How many of you have been told "your scores are great", or "if your
score were 10 points higher, you could get a better rate?”
Most consumers have been faced with some kind of credit issue.
The early creators of the underwriting process felt that, buying a
house should be as easy as buying a car. After-all, houses are attached
to a foundation, they usually appreciate and people usually live in
them. Using that logic, the industry should be able to make the home
buying process easier for everyone.
The theory sounded good, and within the last year there has been some
relief from the mountains of paper that go into loan files, and it
is
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because the credit scoring models have become more refined. Scoring
models figure prominently in the future of how people obtain home
mortgages.
Most people know that most creditors use credit report agencies for
obtaining information on a person when they have applied for any type
of financing. There are three major repositories of credit and
background information. They are Equifax, Experian and TransUnion. When
someone obtains credit, the creditor reports the payment history to
these repositories. This is usually done monthly but may be done on an
irregular basis. These repositories simply accept the information as it
comes in electronically and they DO NOT check the accuracy of the
information.
The credit repositories and other agencies also maintain other
background information on every person in the country who has a Social
Security number or other identifying information. The other agencies
may include the Department of Motor Vehicles, the Medical Information
Board, the FBI, local law enforcement agencies, the county recorders
for each county (public records repositories), etc. Even the mortgage
industry has a central repository for borrowers and lenders who may
have been involved in fraudulent activities in the making of mortgage
loans.
When you apply for a mortgage, your lender will request a credit report
from a credit reporting company. This is usually a local or regional
company. This company pulls together a credit report electronically. It
usually comes from one or more of the major repositories, but it can
come from several sources.
Along with the information, the local credit reporting company receives
a numerical score. The score represents a composite of the borrower's
credit history, employment, ability to save, and so on. The most famous
of these scores is known as the FICO score, which was a model developed
by the Fair-Isaacs Company a number of years ago. It is believed that
the Beacon and TransUnion scores are really scoring information
provided by the Fair-Isaacs Company, but have been tweaked somewhat by
the other bureaus. That is partly true, but what most people don't know
is that, with information streaming into their credit file almost
everyday, the scores can change daily. That is why someone can apply
for a mortgage with one company today and have a FICO score of, say,
717, and apply with another lender a week later and that score can be
higher or lower, depending on the information received at the
repositories in the interim.
The truth is that the Fair-Isaacs Company and the major credit
repositories do not divulge how the scoring model works. Due to the
level of erroneous reporting to peoples' credit files, there has been
pressure on Congress lately to make the credit repositories more
accountable for the accuracy of the information they report AND to
divulge what goes into the scoring models, so that people can know what
to do to improve their scores.
Why is this important? The lending industry is moving toward
"risk-based" pricing. In plain English, this means that the higher
one's credit scores, the less paper they will have to provide to prove
that they are creditworthy AND the interest rate and/or fees a borrower
pays will be based on the level of their scores.
This system, while perhaps unfair to some, will be great for those who
maintain impeccable credit. It's one way that good credit risks can be
rewarded. In the past year, we in the industry have already seen a
dramatic reduction in paperwork requirements and "risk-based" pricing
(rates and fees) has become commonplace.
If you have recently obtained your credit report and you are not happy
with what was reported, you can take steps to correct the erroneous
information on it. There are also proactive things you can do to
improve your scores, if you are anticipating applying for a mortgage
anytime soon. For further information please feel free to contact me.
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Destiny
Mortgage Is a Licensed first and second mortgage broker with the
wisconsin dept of financial institutions. This is not a commitment to
lend. Restrictions may apply. Information is subject to change without
notice. All loans are subject to credit approval. Equal Housing
Opportunity.