Credit Information

Credit quality has always played a key role in an individual’s success in obtaining financing for the purchase of a home or the refinance of an existing home loan. And today, credit quality plays as big a role as it ever has, but some things are quite different now than they were just a few years ago.

In the past, credit decisions on the part of an underwriter were very subjective things. Today, a great deal of the subjectivity has been removed. Today, large portions of the home loans that are funded have been underwritten by automated (computer) systems. Credit histories are translated into credit scores that the automated systems can understand, and decisions about the approval of a home loan can be speeded up and the costs can be reduced.

The Two Home Loan Markets

The home loan market place has split into two distinct categories. The larger of the two is what is known as the prime mortgage market. This is the category for borrowers with good to excellent credit. The prime mortgage market is the home of automated underwriting systems and strong reliance on credit scores. It is where borrowers get the lowest interest rates and the most flexible underwriting.

The second category, the non-conforming market (also known as the sub-prime market or the B/C loan market) is where individuals with varying degrees of credit problems find their financing. Over the past few years the non-conforming loan market has grown at a rapid pace and today there are literally hundreds of lenders willing to make mortgage loans for those whom in prior years might not be able to secure financing for a home purchase. These lenders typically charge higher interest rates (two to three percentage points higher in most cases) than the prime market as compensation to taking on what is perceived as riskier borrowers. These lenders still apply more subjectivity to their underwriting decisions.

Credit Reports

Companies that extend credit to the public report their customers’ payment histories to one or more of the three national credit repositories. The three repositories are Equifax, Experian and Trans Union. When someone applies for a home mortgage, the loan originator pulls a credit report that has data from all three repositories. In addition to payment history data, the credit report also shows information on collections, charge off’s and public records such as judgements, bankruptcies and foreclosures. The repositories also individually compute a credit score for each individual.

Credit Scores

Credit scores are a numerical representation of an individual’s credit history. The scores usually fall within a range from the low 400’s (depicting serious derogatory credit) to the high 800’s (depicting near-perfect credit usage). The dividing line between a “prime” borrower and a “non-conforming” borrower usually falls in the 620 to 640 range.

Credit scores take in much more than just derogatory information such as late payments and collection accounts. For example, a person who has three revolving accounts with a total of $20,000 limit but carries a balance of $5000 will have a better score than a person with $20,000 limit but carrying a balance of $19,000.

Errors on Credit Reports

Companies sometimes make errors in the data they submit to the three repositories. And sometimes the repositories make errors in the way data is presented. It is a very good idea to periodically check one’s credit to be sure the information being reported is accurate. If a person is planning to apply for a home loan, it is especially important to verify what is reported. It’s easy enough to get a copy of your credit report. A phone call to the repository will suffice, or contact a mortgage loan officer who may, as a service, get a credit report at no charge.

If there are mistakes on your credit report, one can often resolve the problem with the repositories directly. But if incorrect information comes from the creditor (the company who extended the credit), that error will have to first be resolved with the creditor. Otherwise, the error will simply be reported again next month. In many cases, writing to the creditor and explaining your dispute may resolve the problem.

If you have a common last name, or if your name ends with Jr. or Sr., it is more likely that credit for another person finds its way to your credit report. It takes 30 to 60 days for corrections to find their way through the system to be reported on your credit report. Therefore, it is a good idea to check your report for accuracy that far in advance of applying for a home loan.

Contact Credit Bureaus

If you find discrepancies on your credit report, you can contact the three credit reporting agencies at the following numbers: