The Home Buyer's Korner

Information presented should be used for educational purposes only.

July 20th, 2014

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Understanding FICO (Fair Isaac) Scores


ficoIn the mortgage-lending world, FICO (Fair Isaac) scores either makes or breaks your application, when it comes to obtaining a home mortgage or getting the best rate. This is the “mortgage rating” system used to get a mortgage. Simply, FICO scores are numbers calculated based upon your credit history. The better your credit, the higher your number or score will be – the worse your credit, the lower the score.

In some instances, lack of credit results in “no score” on your credit report requiring you to provide “alternative credit” via your rental, utility, telephone, insurance or other unreported credit payment histories from companies that may have extended you credit, such as a buy here pay here auto dealer, or furniture company.

Functionally, FICO scores were created to simplify the mortgage lending industry – to the contrary many brokers and lenders feel this manner of scoring creates more problems.  Generally, FICO scores of 640 or less will have a serious impact if you can get approved on many types of mortgages and securing favorable rates.  

There are reasons why you might have a FICO score lower than 640, such as limited credit use or an isolated late payment on the only account.  

You have recently been shopping on-line for favorable terms and the credit card issuers will have pulled your credit report to determine financing terms.  

Frequent inquires can drive your FICO score down.  The situation often happens when you have been looking to purchase or lease an automobile.  A good way to determine that this may have been the case is to review the recent inquires on your credit report. 

Clearing Credit Mistakes 

It is common to find negative items on a credit report that does not belong to you. Recent studies indicate that up to 45% of all credit reports include erroneous items. Under the Fair Credit Reporting Statutes you have the right to challenge such items.

Credit reporting agencies must investigate disputed items and correct them within 30 days. They must also demonstrate that their information is accurate and if they do not, they are in violation of the law.  

Anything they cannot prove must be removed from your credit report and a corrected version of the report must be sent to anyone who recently received the inaccurate version. 

If you find mistakes on your credit report, the first step is to send a challenge letter to the agency that reported the item. When a credit reporting agency receives a dispute, it must investigate 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 credit 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 the credit report showed that you were late in making payments on accounts, but failed to show that they were no longer delinquent, the credit-reporting agency must show that their payments are now current, or if the credit report showed an account that belongs 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 credit report in the past six months. 

If a reinvestigation does not resolve your dispute, the Fair Credit Reporting Act permits you file a statement of up to 100 words to explain your side of the story. The credit-reporting agency must include this explanation in their report each time it sends it out.  

Be aware, however, that when negative information in their report is accurate, only the passage of time can assure its removal. Credit reporting agencies are permitted by law to report bankruptcies and judgements for 10 years and other negative information for seven years. The start dates for these periods are based on the date of last financial activity.  Therefore, if you had a Profit and Loss indicated on your credit report several years ago and recently made a payment on the account the clock begins ticking based on the new date the last payment was received.   

How to Register a Dispute 

You must make your dispute directly to the credit-reporting agency. Although the Fair Credit Reporting Act does not require it, the Federal Trade Commission staff recommends you submit your dispute on-line, along with copies of documents that support your position for uploading.

Your dispute should clearly identify each item in your credit report you are disputing; explain why your are disputing the information.  State the facts and request deletion or correction.  

Credit Reporting Agencies 

The following are the recommended reporting agencies to direct your dispute to:

Experian

Equifax Credit Information Services

TransUnion

Clearing Open Collection Accounts 

If your credit report shows you have open collection accounts, you can request the collection agency to remove the items from your credit report, if they agree it is paid.  You should get a release known as a “Settlement Letter” that authorizes the local credit-reporting agency to remove it.  NEVER accept a verbal confirmation from the collection agency.

Most collections need to be paid before qualifying for a mortgage however; some loan programs allow collections to remain unpaid up to a stated dollar amount, if they were caused by a medical problem or will not be attached to the title on the property.

Lenders seldom allow open collections to remain on conventional financing and you may find better options with an FHA or USDA loan in this event.  

Re-Aging Old Pass Due Accounts 

You are also entitled to ask creditors to re-age your account (start over), so the old late payments will no longer appear on your credit record. Each month creditors send in a magnetic tape to the credit agency and if they delete your applicant’s account on the tape it is automatically removed at the credit agency.

Building Credit 

If you have an “insufficient credit file” or “no credit file” and you have accounts with creditors that do not appear on your credit report ask the credit-reporting agency to add this information to future reports. Although they are not required to do so, many credit reporting agencies will add other verifiable accounts upon request.

For the mortgage loan, the agency may be able to build credit by obtaining credit letters from local sources, such as your landlord; phone or utility company; or anyplace you’ve purchased a TV, tires, furniture, etc., or any business that can write a credit reference letter.   Generally, you will need to provide at least three credit letters if you do not have a credit ratings on their credit report. 

Credit Inquiries 

When considering buying a new home, be careful with credit inquires. Generally, lenders do not like a lot of inquires on a credit report. Excessive inquires can result in a credit denial.  

Letters of Explanation for your lender 

Frequently a letter of explanation will help if there are unusual circumstances. Emergencies, extended out-of-area travel during the payment period, mortgage payments which rolled over from one month to the next, banks which held checks until they cleared, medical problems, bills sent to the wrong address, items that really don’t belong to you, items that were covered in a divorce settlement are just some of the possible explanations that could work for your lenders in lieu of getting something removed for your credit report. 

Requesting or Disputing Information 

When you are requesting information or disputing information on your credit report you should always include: Your full name; spouse’s full name (if relevant); current address; previous addresses going back five years; the date of birth; social security number(s) and phone numbers (home and work).

If disputing information include: a credit ID# from the reporting bureau, the account name you are disputing; account number and the reason you are disputing the item. 

After the credit-reporting agency receives your request it has reasonable time, which in most cases has been considered 30 days to investigate any the issue and is required to send you a written report of its findings. 

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