With the current economic environment, and changes in the mortgage industry. credit has become of significantly more importance to a borrower's qualifications than it has been in the past few years. The statistic I read last week was that of the 228 million Americans who are eligible to receive credit and have credit scores less than 25% have any real knowledge of the credit scoring process. Odds are good, 75% of your clients fall into the other category and need our help to understand how to navigate within this system.
Time and again I've seen the misinformation that surrounds the credit scoring process often lead to greater harm before we have a chance to help. For instance, clients are often advised to pay off all of their collections in order to raise their scores. This is a myth. The truth is, taking a collection older than 2 years old and paying it off will reduce their scores because they've brought something that was out of the spotlight front and center again.
When someone comes to me in need of credit advice, the first thing I do is make sure they have a current copy of their credit report. The Fair Credit Reporting Act guarantees consumers are all entitled to receive one free copy of their report annually. The place to do this is www.annualcreditreport.com.
I then talk to them about how their credit scores will impact their qualifications for the mortgage they're applying for. 580 is currently the lowest score I can work with regardless of automated underwriting decision. With the advent of risk based pricing on Fannie Mae and FHA loans, the best conforming rates are now only available to borrowers over 720, and the best FHA rates require a 640. (For those of you who still think FHA is a more difficult process than conventional financing, you need to get over that misconception yesterday. Unless a client has at least 20% down on a transaction, FHA makes more sense 95% of the time since the private mortgage insurance companies are now also on a tiered pricing schedule for both credit and LTV.)
Out of the five factors that go into scoring, theres really only one that can help someones scores change within the next credit cycle: Proportion of revolving balance to credit limits. If someone has high balances on credit cards, reducing the ratio of balance below 35% of limits can have a dramatic impact on score. I just saw it improve someone's scores 50 points from last month!
We're really just scratching the surface now, but I need to stop here for now. If this information has been helpful, please give me some feedback so I know how to structure the next post. If you feel you need more information, please email me and request my handbook on credit scoring and repair that all of my clients receive.
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