Credit Awareness... great read!!!

Mortgage and Lending with Model Citizens "NO POINT LOANS"





Most of the anxiety in a mortgage transaction is caused by the loan application process. Most people today can't afford to pay cash for their homes so the loan process is one we can't avoid.

The two major unknowns of the loan process are whether you will get approved and at what percentage rate. Both of these depend primarily on your credit. The better your credit the better your chances for approval at a low rate with less documentation required. But what exactly is good credit? What's the difference between A credit, A- credit and B credit? Every bank has its own rules and definitions. That's where credit scores come in to play.


Lenders need a way to simplify the loan approval process. They wanted to make it more streamlined, (to reduce costs) and more impersonal (to avoid lawsuits). To solve this problem a company called Fair Isaac developed a credit risk model based on thousands of credit histories. The Fair Isaac Model called FICO was the first credit scoring system to hit the mortgage industry.

The FICO score is a number between 350 and 850 that tries to determine how much of a credit risk a consumer is. The higher the score, the less risky.

In the early 1990's, Fannie Mae, (FNMA) started requiring credit scores on all loans submitted to them for purchase. FNMA is the company that buys mortgage loans from lenders and banks. Therefore, most banks and mortgage companies need you to qualify under FNMA loan guidelines so that they can sell your mortgage note to FNMA.

FNMA decided that 620 would be the cutoff credit score. They stated they would not buy the loan of anyone with a score below 620 because they consider that loan to be too risky. What happens is that loan then becomes harder to sell on the secondary market which in turn causes the rate for the borrower to go up due to the investors risk factors being higher.

Where do you stand? What are your credit scores? Feel free to call me and have me pull a credit report for you so we can go over what you can do to improve your credit rating.


There are three major credit bureaus. Equifax, Experian and Trans Union. Each of these bureaus has a personal credit file on you and they each have different information available in their reports. They all generate a credit rating based on the information they are provided. Sometimes creditors do not report to all three bureaus which is why your score varies.

What this means is you have 3 credit reports and 3 credit scores. Equifax uses a score called Beacon, TransUnion's is called Empirica and Experian uses FICO. Depending on what information is being reported, your score could vary drastically from bureau to bureau. I've seen clients of mine have a score of 700 with one bureau and a 595 with another.

Lenders have gotten around this by saying that your middle score must be 620 to qualify for FNMA financing. For example, if your scores are 650,635 and 619 you would qualify for FNMA loans because your middle score is a 635.


The process of determining the scores is a very difficult mathematical calculation. They take dozens of items into account. Here is a basic summary of what affects you the most.
Payment history is 35% of your credit score. Lenders are most concerned about whether or not you pay your bills. The best indictor of this is how you've paid your bills in the past. Late payments, collections, and bankruptcies all affect the payment history of your credit score. More recent delinquencies hurt your credit score more than those in the past.
Debt level is 30% of your score. The amount of debt you have in comparison to your credit limits is known as credit utilization. The higher your credit utilization - the closer you are to your limits - the lower your credit score will be. Keep your credit card balances at about 50% of your limit or less.
Length of credit history is 15% of your score. Having a longer credit history is favorable because it gives more information about your spending habits. It's good to leave open the accounts that you've had for a long time.
Inquiries are 10% of your score. Each time you make an application for credit, it's added to your credit report. Too many applications for credit can mean that you are taking on a lot of debt or that you are in some kind of financial trouble. While inquiries can remain on your credit report for two years, your FICO score calculation only considers those made within a year.
Mix of credit is 10% of your score. Having different kinds of accounts is favorable because it shows that you have experience managing a mix of credit. This isn't a significant factor in your credit score unless you don't have much other information on which to base your score. Open new accounts as you need them, not to simply have what seems like a better mix of credit.
Once you know how your credit score is calculated, it is much easier to take the steps to build good credit.
Basically, every piece of bad information on your report lowers your score. Major bad listings are collections, bankruptcies (with late payments after the bankruptcy was discharged), consumer counseling (just a bad as a bankruptcy) and of course foreclosure. Some minor bad listings are late payments (late payments on your mortgage are the worst, go late on everything else before you go late on your mortgage), high balances and too many accounts open.


· Stop applying for credit - no more inquires
· Pay down credit cards below 50% of max limit
· Consolidate student loans
· Have incorrect information removed from credit
· Close accounts you do not use
· Lower payments on your car by refinancing
· Lower payments on your mortgage by refinancing

If you have negative information on your report that you cannot remove, the bureaus say the best way to improve your score is to let time go by. The older the negative information gets, the less important it becomes in the credit score mathematical equations.


Credit scores are now being used in many more places then just the mortgage approval department. Credit card companies are calculating their interest rates off of your credit score, even insurance companies are accepting and rejecting applications based on your credit. Some people are starting to protest the use of credit scores in certain industries like insurance, but the benefits of credit scores outweigh the negatives, at least as far as the lenders are concerned. I see credit scores becoming more main stream and getting to the point if it's not already, where applications will be accepted or rejected solely based on your past credit and that is why it is so important to make sure yours is as high as it can be.

No one wants the bad things of their past to affect their future and everyone wants to be able to do what they want when they want.

Talk to me directly to see if there is anything you can do to raise your score. My cell is 804-432-3708

Thank you

Justin Hartman

Comments (1)

Sean Allen
International Financing Solutions - Fort Myers, FL
International Financing Solutions


Excellent article on how Credit will affect people.

Sean Allen

Jan 12, 2008 04:51 AM