The truth about How Credit Really works

The truth about How Credit Really Works

Normally when you get emails from most loan officers,they are trying to solicit business from you.  The Audacity. So I just hit the delete button. But this particular email from Annapolis MD Loan Officer Tammi Lewis with First Home Mortgage provided very pertinent information about credit that was worth sharing. And I sent her an email saying that I would share it. Who doesn't want to learn about Credit? I know I do. After reading this blog I learned some things about credit that I didn't know. Hopefully you do too.

CAUTION: This blog post is very lengthy. So you might want to grab some hot chocolate,water or whatever you drink for this one.

What is the difference between an Advantage Score and FICO score model?  Advantage Score models are used for the credit reports that consumers pull such as Credit Karma or FreeCreditReport.com. A mortgage lender uses a credit report that uses the FICO score model which weights the items on the credit report much stricter. The credit scores that a lender sees under the FICO model will almost always be lower than the credit scores a consumer sees under the Advantage Score model.  

Consumer disputes are a roadblock that often present themselves during pre-approval.  Many consumers believe that putting an account into dispute will help them when they go to apply for a mortgage. Most times the opposite is true because by putting the account into dispute, it stops the account from reporting to the credit bureaus so a mortgage lender cannot get a fair reflection of the credit scores. If the account is in dispute and reported within the last 24 months, a lender will request that the dispute be taken out which can have a negative impact on a buyer’s credit scores. 

Under the Fair Credit Reporting Act, Consumer Credit Reporting Agencies are allowed to share lists that contain the information of people who have had recent credit inquiries such as a mortgage application.  Companies and sometimes individuals purchase those lists with the intention of soliciting and selling additional credit and loan services, known as “Firm Offers” to unsuspecting buyers. How can your buyer opt out if they do not want to receive these solicitations? By visiting www.OptOutPrescreen.com. This prevents the Consumer Credit Reporting companies from providing the buyer’s information for Firm Offers. The buyer can choose to opt-out permanently or for five years and can also opt back in anytime. 

Originators are sometimes challenged by borrowers who want to be pre-approved but are concerned about their scores dropping when we pull their credit? According to CFPB guidance, multiple mortgage specific inquiries are treated as 1 inquiry. So a buyer can apply up to as many mortgage lenders for 45 days and it is treated as one inquiry, not multiple inquiries. If the INITIAL inquiry has any impact at all which most times it does not, the impact would be 3 points or less.   

What is on the horizon that might impact credit reporting?  It is not here yet but there is talk about adding alternative credit references such as utilities, gym memberships, cell phone services, etc. that could become a part of the credit analysis model. 

What advice can a Loan Officer give a buyer to help raise their scores?  Credit cards are very useful in helping buyer’s raise their scores, buyers should not be afraid of credit cards and should be using them to re-establish their credit if they have had issues in the past. By charging a small balance on the credit card, leaving the balance there every month and paying it on time each month will help a buyer boost their scores quickly. 

What 2 things should a Loan Officer NEVER tell a customer while counseling them about their credit?  They should never tell them to close an account, especially if the account is in good standing because it will drop their scores. And they should never tell them to pay old derogatory debt like collections because it could also drop their credit scores. The date of last activity is triggered to the present and the payment of the collection account can act like a brand new collection on the credit report hence dropping the score.