CREDIT & Credit  Scoring

There are “3” credit  reporting agencies (Experian , Equifax  and TransUnion).  Each offers its own variation of the score.  They all tell the same story but are reported with different names.

The scoring system is based on credit data obtained from millions of credit users.   It determines patterns and predicts how an applicant will perform on the repayment of a loan.

1.      EXPERIAN  (formally TRW), reports using a FICO  score.

2.      EQUIFAX  reports using a BEACON score.

3.      TRANSUNION reports using a EMPERICA score

Although all three are used, the most commonly heard score is FICO .  The underwriter will use the MIDDLE score.  The high and low score are ignored.

Example:  your scores are…    682, 675 & 690.   We will use 682.

Mortgage lenders have moved to a new system of credit  grading.  They now score to determine the “risk” of the average customer.  Below you will find some interesting and needed facts about these scores .

1.      Almost every lender uses these scores.

2.      Credit  Scores range from 350 to 875.  If the applicant has scored below 620, the system has determined that the odds of a future delinquency is 10 to 1 (in other words…a good chance), however, if the score is above 800, the odds are 1000 to 1 that the applicant would perform poorly on a loan.

3.   A score of 620 or less could be an “automatic” FNMA /FHLMC  denial.  THIS

      DOES NOT MEAN YOU CAN’T GET A LOAN, JUST THAT YOU CAN’T

      GET A LOAN AT MARKET RATE.  We have plenty of 100% programs for

      people who score in the 500’s.

4.   Scores are based on “5” factors.

      35% = Late payments, collections, charge offs, judgments, bankruptcies.

      30% = Outstanding debt (maxing out the credit  cards).

      15% = Length of credit  (how long accounts have been open). Longer = Better

      10% = Type of Credit   (revolving {credit  cards} vs. finance companies)

      *Finance companies (Beneficial, Avco) will impact more negatively than department store credit  cards.  Finance companies lend to people who need money fast and charge higher rates.  These people are more of a risk.    **However, if revolving credit  is negative, scoring will be harder on revolving than finance companies. 

Summary: Bad to have finance companies, worse if you have finance company and delinquent revolving.

       10% = Inquiries or NEW credit

5.  Factors not included:  Race, Religion, Gender, Marital Status, Address, Wages earned, Height, Weight, Birthplace.

How can you better your score?

Scores reflect borrowers’ credit  payment patterns over time with most emphasis being placed on recent information.  To improve scores , borrowers should pay bills on time.  Delinquent and Collections will have a major negative impact on the score.  Pay down the balance of accounts to below 50%, but do not necessarily close the accounts.  Paying off revolving debt before installment (car loan, student loan) will have a more significant impact toward raising the borrowers’ score.  Moving balances from one card to another to save interest could negatively impact the score. 

You should run your credit  at least once per year, and if you are buying a home, a credit  report should be run at least 90 days before starting the process.

Any derogatory credit  should be addressed to the 3 credit reporting agencies (Experian , Trans Union  and Equifax ).  In the case of a Bankruptcy, accounts may still appear on the credit  as chargeoff and collections, sending copies of the BK discharge papers and a letter to the credit  reporting agencies could increase the credit  score into the acceptable range.

Credit  reporting agencies:

            Equifax P.O. Box 740241 , Atlanta , GA 30374-0241 ; (800) 685-1111
            Experian (formerly TRW)  FICO scores    P.O. Box 2104 , Allen , TX 75013 , (888) 397-3742
         Trans Union  BEACON Scores    P.O. Box 1000 , Chester , PA 19022 ; (800)916-8800

NOTE:   Accepting a low credit  score rating may result in becoming a “B-C” customer rather than an “A” customer, this means you will pay a higher than standard interest rate and most likely be approved for an ARM (Adjustable Rate Mortgage) and not a fixed rate.  You should deal directly with the credit grantor (the person who gave the credit) and the three credit reporting bureaus.    It could take up to 6 months or more to clear up wrong info on the credit report and move a borrower from a “B-C” borrower to an “A” borrower.   

Click the PRE-QUAL link to your left.  Complete the PRE-QUAL and we will run your credit for FREE!

You may also call Dan Palumbo @ 800-817-8743  ext. #201

Dan is the published author of the Mortgage Loan Officer Training Manual.  You may order one by visiting www.mortgagetrainingmanual.com

Licensed Mortgage Banker - New Jersey Department of Banking and Insurance; Licensed by the Pennsylvania Department of Banking; Virginia Licensed Mortgage Lender