Understand Your Credit Scores and Win the Game

I cannot over stress the importance of monitoring your credit scores annually to ensure that you pay the lowest rates on home mortgages, auto loans, credit card debts, and safeguard yourself against identity theft. In times past credit scores where used most often to develop your risk profile in consideration for a loan and to set interest rates. Today, property insurance carriers and life insurance carriers consider credit scores when setting premiums and this trend is evolving into a variety of industries.

A consumer’s credit history is archived by three service providers; Equifax, Experian, and Trans Union and their databases are often consolidated into a single report by third party credit agencies. The report is generally referred to as a credit report and it includes a credit score issued by each service provider. The scores range from 350-850 and are graded based on a set of criteria which includes payment history, account balances as compared to credit limits, amount of recently accumulated credit and inquires, among others factors.

The following generally outlines how a variety of traits within your profile may affect your credit scores and risk profile: Length of Credit History 15%, Payment History 35%, Credit Balances Owed 30%, and Recently Obtained Credit 10%. According to Colorado based Advantaged Credit of Colorado an example of a consumer’s favorable profile would include two installment loans, three revolving accounts with balances, balances on revolving debt below 30% of the high credit limit, no collections, no public records (judgments or liens), no foreclosures, no late payments.

My advice would be to obtain a copy of your credit report annually. This can be done by contacting each of the three credit service providers directly, or by accessing free online resources such as http://www.annualcreditreport.com/ . Once you have obtained your report, review it carefully for discrepancies including inquires made against your credit files. Report inaccurate information directly to the associated credit service providers; keep in mind that the information retained by the three providers may vary and the data is often 30-60 days delayed, so some information such as account balances may not be accurate. The law provides consumer protection and false information must be removed by the reporting entity.

Bottom Line: To safeguard yourself against identity theft or credit fraud review your credit report annually, immediately report any discrepancy; ask your property and casualty insurance agent if you are eligible for premium discounts for high credit scores. It is also important to make lenders aware that you understand that interest rates are a reflection of risk and that your good credit should be rewarded with the appropriate interest rates. If you have legitimate credit problems, seek the advice of a qualified credit consultant and develop a strategy to restore your credit profile. Beware of anyone who promises that they can remove negative information from your report for a fee, legitimate information cannot be removed and you will be disappointed.

Resources: Here is the contact information for the three credit service providers: Equifax 1-800-685-1111 http://www.equifax.com/, Experian 1-888-397-3742 http://www.experian.com/, and Trans Union 1-877-322-8228 http://www.transunion.com/

Can a Borrower Obtain a Mortgage While in Consumer Credit Counseling?

If your goal is to purchase a home in 2007 and you have credit issues needing to be addressed now is the time to structure a “game plan” to ensure that your goal can be accomplished. When consulting with credit challenged clients we often engage with individuals who either are considering or are presently working with a Consumer Counseling Agency such as CCCS. The decision to enter into a modified payment agreement should be carefully considered to ensure that all of your goals can be met.

How do mortgage loan underwriters view borrowers currently working with a credit counseling agency? This week I sought the opinions of two experts on the subject and here is an overview:

I spoke with the Sr. Underwriter for Cherry Creek Mortgage Company to gain perspective from the mortgage loan underwriter’s point of view.

FHA and VA Borrowers – If a borrower utilizes an FHA or VA loan product, the borrower is eligible to receive a mortgage if the following three requirements are met.

1. The borrower has been in an approved consumer credit plan for a period of at least 12 months.
2. The borrower has a satisfactory “paid as agreed” record with the agency as set forth in the agreement.
3. The borrower has obtained written approval from the counseling agency to enter into a mortgage loan agreement.

Conventional Borrowers – For borrowers seeking a Conventional loan such as a Fannie Mae or Freddie Mac program the situation is quite different. The guidelines for these programs require the underwriter to view a consumer credit plan the same as a Chapter 13 Bankruptcy plan, which must be fully paid prior to entering into a mortgage loan agreement.

I spoke with a program specialist with Consumer Credit Counseling Services which is a HUD approved counseling agency and ask the question, “what are the factors that effect the decision to allow a borrower to enter into a mortgage loan agreement?”

There are a number of consumer driven factors which include the following:

1. Is the agreement with the existing creditors for full or partial payment of the credit balances?
2. Can the borrower’s adjusted debt to income ratio support the addition of a mortgage payment?
3. Has the borrower made the consumer credit plan payments as agreed?

Additional factors to consider before entering into a consumer credit plan:

1. If the consumer budget results in a plan for partial payments to creditors, many report “payments not as agreed” on the consumer’s credit report.
2. The consumer’s present credit report will impact Alt A or Sub-Prime underwriting decisions.
3. After the payment plan has been paid as agreed, the reporting agencies will remove all references to consumer credit counseling, etc.

The Bottom Line: Whether you are currently enrolled in a consumer credit plan or considering doing so, your dream on purchasing a home is still a possibility. I recommend scheduling a private consultation with a knowledgeable mortgage professional in order to make an informed decision. I also recommend avoiding the tendency to be steered into a sub-prime mortgage, which usually calls for higher rates, pre-payment penalties, and less favorable terms overall than the options noted above.