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Mortgage Basics 101 - What's the Deal with Credit Scores?

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Education & Training with REISA - 317-663-4173

OK, the search is over! After months of searching for homes and interviewing mortgage brokers you find the perfect deal

Now that home you have been planning on buying is in your site.  Over the last year you made sure that your paid your bills on time. In fact when you bought that new convertible a year ago the salesman said your scores were over 680! This is good right?

Along with that new car you wanted to be sure that your new home looked perfect so you took advantage of all of those credit card offers you got in the mail. Now your getting excited. You have the right house, the right price, the right car, the right furniture only to get a call from your Loan Officer. What happened?

They tell you that they would love to get you a mortgage but your scores are to low. Your now a 575. Now you freak out. You can't understand. Just last year you were over a 680 when you bought your car. How could my scores have dropped? I got all those new credit cards! What happened? Lets take a look.

What is a Credit Score
Well, there are three major credit bureaus. Trans Union, Equifax and Experian. Each has its own method for calculating your credit score. Scores range from 300 - 900 depending on the bureau. The higher the number, the better your score is perceived. Creditors see the number as an indicator that an individual will repay a loan. Typically, scores are determined by the following factors:

  • Your history of late payments
  • Balances owed
  • Length of Credit History
  • New Credit
  • Number of Credit Inquires

Now in the example above you can see what happened. The client took on a large amount of new debt in a short amount of time. When you do this you lower your scores. So what should they have done? Lets take a look at something I call "Keeping Score:"

Lets say your score is 100.

 

 

 

 

 

Out of that 100:

  • 35% is based on your credit history. It is highly weigh on the amount of late payments. Your score will get "hit" less after two years and the late payments will fall off after 7 years. Also a bankruptcy, foreclosure, repossession, collection, and judgement will have a negative effect on your score.
  • 30% is based on your Debt Ratio. The credit bureaus do collect employment and income information and your debt-to-income will have a effect on your score. (A more detailed blog on DTI will be published at a later date. Make sure you come back. It's important)
  • 15% Credit Length - In a nutshell, how long have you had the credit.
  • 10% Credit Type, Mortgage, Automotive, Installment, Revolving (credit card). High number of revolving credit hurts your score.
  • 10% # of Inquiries (When credit is pulled for a major installment such as a Mortgage or Vehicle your score should not be affected in a negative way if the credit pulls are done within 10-days)

So with the example I presented (it is a real story. Names and places have been eliminated to protect the innocent. Come on, it's a little funny). While the client had good credit by taking adding the car and all the credit card debt cost over 100 points in the clients credit score. All while paying the bills on time. Folks do not be surprised! Real estate agents, get credit early to help structure your deal. Call me If your in my market I will give you a FREE, yes FREE financial analysis that will help qualify your buyers. And if you have been reading my blog you know I know what I am talking about.

So now that you been to Tony's 101 of credit scoring how do you improve your scores?

  • PAY YOUR BILLS ON TIME (what a novel idea). Delinquent payments and collections have a major negative impact on your score.
  • Keep balances low on credit cards and other "revolving credit." Example department store charge cards.
  • Apply for and open new credit accounts only as needed. Don't open accounts just of the sake of it - it probably won't raise your score.
  • Pay off debt rather than transferring it around. Also, don't close unused cards as a short-term strategy to raise your score. Owning the same amount but having fewer open accounts may actually lower your score.
  • Correct any errors that appear on your credit report when brought to your attention. (Be careful of companies that say they can get rid of your bad credit. Negative items can not be legally removed. PERIOD.) I will also have a future post on this. Wow, you need to be sure to subscribe to my blog. I am going to give you so much education over the next few months your going to make a fortune!
  • Review your credit report regularly so you know what is being reported. It won't affect your score to request and check your own credit report. (BTW, when your my client I set up a annual meeting so we can do this. Guess how much it cost? Yep. FREE AGAIN! You have to ask why your not doing business with me?
  • If you don't do anything else, do this. Right now (don't wait, your already on the Internet), go to http://www.optoutprescreen.com/. This is another FREE service (notice I have a thing about giving away things). What is does is takes your information out of the data bases for credit offers. You will not longer get all that junk mail and since you will be less of a credit risk (and that is a good thing) your score can rise from 5 - 50+ points in as little as two weeks. Yes, it really does work!

"OK, I'm starting to listen. How long does it take to rebuild scores?"

The answer: Not long at all! If you take the necessary steps, you can begin increasing your scores right away. I've seen dramatic changes take place within as little as 6 - 12 months.

The first step is to eliminate all derogatory accounts - another reason debt consolidation loans are so beneficial!

Second, make sure that once an account is paid, the credit bureaus reflect the payment.

Third, begin rebuilding credit little by little  by making your mortgage payments and car payments on time. Set up automatic withdrawal if possible to avoid late payments. Remember - you have a full 30-days to make a payment on time before it's considered late on a credit bureau.

After you get your report and find errors you need to contact the credit bureaus. It will not go away until you do something:

Trans Union
2 Baldwin Place
P.O. Box 2000
Chester, PA  19022
http://www.transunion.com/

Equifax
P.O. Box 740241
Atlanta, GA  30374
http://www.equifax.com/

Experian
Call 888-397-3742
http://www.experian.com/

The end of the story. Yes, the story I told above was true. While it took some creative work (including taking some furniture back) I was able to get the client approve and they were able to get the home they deserved and wanted.

Happy Selling!
Tony Grego - Indiana Mortgage Broker

Quote of the Day:
Life is an onion. You peel it off one layer at a time, and sometimes you weep.
--Carl Sandburg

Comments (10)

Zen Ziejewski
Keller Williams Realty - Laguna Niguel, CA
Laguna Niguel Real Estate

Tony, Thanks for all the great info. With what happened regarding the credit crunch any bit of expert advise for my clients is much appreciated.

Feb 06, 2008 06:54 AM
Tony Grego, 317-663-4173 #1 Trade Association for Alternative Inv
REISA - 317-663-4173 - Indianapolis, IN

Thanks Zen,

While it will be a good year for us all it is will be more of a Full Doc type of year. It will be very interesting to watch. Sooner or later they are going to want that margin back and will see how deep they get this time.

Happy Selling!

Feb 06, 2008 07:02 AM
Jonathan Sprouffske
Connolly Tacon & Meserve - Olympia, WA

Thanks for the summary Tony.  Great information!!!

Feb 06, 2008 07:36 AM
Tony Grego, 317-663-4173 #1 Trade Association for Alternative Inv
REISA - 317-663-4173 - Indianapolis, IN

Hope it helps Jonathan.

Happy Selling!
Tony Grego - Indiana Mortgage Broker

Feb 06, 2008 07:51 AM
Rick Kellow
Cherry Creek Mortgage - West Bend, WI
FHA & Reverse Mortgage Expert

great info... I really enjoyed the quote...

Rick

Feb 06, 2008 07:56 AM
Jeff Fullmer
FM Properties - Idaho Falls, ID
Real Estate Investor/Financier
Getting the info on credit scores out there is so vital! So many know so little about it and what makes up the score.
Feb 06, 2008 08:39 AM
Tony Grego, 317-663-4173 #1 Trade Association for Alternative Inv
REISA - 317-663-4173 - Indianapolis, IN

Hey Rick! Thanks for the feedback. While new on AR I plan to provide useful posts that will make us all a little $$ and have happy clients.

Happy Selling!
Tony Grego - Indiana Mortgage Broker

Feb 06, 2008 08:41 AM
Tony Grego, 317-663-4173 #1 Trade Association for Alternative Inv
REISA - 317-663-4173 - Indianapolis, IN

Thanks Jeff for the support. Folks just don't know what can really hurt them or just how much something like opting out can do to help.

Happy Selling!
Tony Grego - Indiana Mortgage Broker

Feb 06, 2008 08:42 AM
Tara Colquitt
Tara Colquitt, The Credit Woman, LLC - Philadelphia, PA
Credit Counselor

One clarification Tony: Consumers can use the Fair Credit Reporting Act to dispute derogatory credit. It is lawful and the operative word in the law is reporting. If not reported correctly, it cannot remain on the reports.

And there are credible companies out there to assist in this process. But just like the mortgage industry, there are plenty of companies/individuals that are fraudulent. People have to do their homework.

Thanks again for excellent information in your post.

Feb 17, 2008 06:02 PM
Tony Grego, 317-663-4173 #1 Trade Association for Alternative Inv
REISA - 317-663-4173 - Indianapolis, IN

Thanks for the help. See, this is why their are professionals like you. When folks are sick they go to a doctor. When they get in legal trouble they go to a lawyer. When they have problems with credit they need to see someone like you a Consumer Credit Advocate. While I will not go into the challenges with the credit bureaus they are needed and one day they may report a little better.

Happy Selling!
Tony Grego - Indiana Mortgage Broker

Feb 18, 2008 04:57 AM