About Credit Scores

Your Credit History

As part of the loan application process, virtually all lenders will want to see a copy of your credit report. The report will list all your long-term debts (credit cards, mortgage payments, automobile and student loans, etc), as well as your payment history and other pertinent information, such as judgments against you or bankruptcy filings. If you don’t have a copy of your credit report, most lenders will generally require you to pay for a copy when they process your loan application. 

Credit Scores

Currently there are three major credit bureaus in the US: Equifax, TransUnion, and Experian.  Each of them maintain separate files that are updated by various creditors around the country.  Each has its own scoring model, that rates a person between 350 and 850 on their credit.  Most Americans have scores in the 600s, but scores below 500 and above 700 are common.  Top-notch credit requires a 720 middle score or higher, but the number is not cast in concrete. 

Your middle score or mid-score is the one, regardless of which bureau it came from, that is not the highest score and not the lowest score.  So, if you have 623, 696, and 652 scores, then 652 is your middle score. 

Poor credit is generally recognized below 580, although many lenders don’t lend in the marginal range below 620.  Bankruptcy and other poor credit habits can put a score below 500.  Meticulous attention to details and making payments on time can put a score well over 700, even 800. 

Scores take into account a number of factors, including on-time payments on existing and past lines of credit, the amount of credit available to the borrower and how much of that the borrower is actually using, and other information that would affect the ability of the borrower or indicates his willingness to repay.  A good borrower is able to repay and shows a history of being willing to pay back borrowed money. 

Get a Copy of Your Credit Report

Most real estate experts agree that it is a good idea to obtain a copy of your credit report several months before you apply for a loan. This is so you have a chance to resolve any problems with your credit before your lender sees it. U.S. Federal law ensures that you have access to your credit report, which may be obtained from your local credit bureau or any of several national firms that specialize in credit reports. 

To obtain a copy of your report from all three bureaus go to AnnualCreditReport.com.  This is the official government-sponsored website and it charges zero to sign up and get the reports.  Be wary of other similar sounding website names.  You can confirm that this is the official site at the Federal Trade Commission website. 

Late payments

For most people, problems with their credit report are likely related to late payments on a debt. If you were late one month in paying off your credit card, but otherwise have a good payment history, chances are most lenders won’t be too concerned. But if you have a history of late payments you’ll need to document the reasons why. A slow payment history won’t necessarily get you turned down for a loan, but you may have to pay a higher rate of interest or otherwise prove to the lender that you can repay your loan in a timely fashion.

Many lenders are now requiring zero late payments in the last 12 months and in some cases for the last 24 months.  This is a major shift in policy from previous years – be aware. 

Bankruptcies and foreclosures

There’s no getting around it, a bankruptcy on your credit report is not a good thing. But that doesn’t mean you still can’t obtain a loan. Even though a bankruptcy may stay on your credit report for seven to ten years, lenders will often consider the circumstances surrounding a bankruptcy (family illness, injury, etc.). Moreover, if you have re-established good credit since the bankruptcy, a lender will be more inclined to approve your application.

Is there a difference between a reported deed-in-lieu and a short sale?  No.  For credit purposes if you didn’t pay back the whole amount of your mortgage loan, the nature of the disposition isn’t that important.  Giving the lender your deed in lieu of paying the mortgage balance or short-changing the lender when selling to a third party still means the loan was not paid off.  (If the property were worth more than the balance, a borrower would just sell it and pay off the loan instead of deeding it to the lender.) 

Errors on your credit report

Many people are surprised to learn that credit reports can often contains errors or inaccurate information. If this is the case with your credit report, you’ll need to contact the reporting agency or creditor to have the problem resolved. This can sometimes be a slow process, so make sure to give yourself time to clear up the mistake.  Some people advocate disputing negative reports that are true.  While for a few weeks the item may be tagged as in dispute by the consumer and its effect on your score removed, eventually the item will likely return.  Worse, the Date Last Active (DLA) will move forward to be current, making its effect in the scoring model higher than before.

Sometimes health insurance companies don’t pay in a timely fashion that results in items on your credit report that are tagged Medical Data.  These items don’t really hurt your score unless and until they are sent for collection or are reported as Charge-Offs.

The worst charge-offs, however, are those for housing-related expenses, like electric bills, gas bills, water, sewer and so on.  Don’t let old utility bills keep you from getting a house.  Pay them off.

Liens for unpaid government charges like trash bills or mowing on a property are bad news, too.  Don’t let these go unpaid for long and get them cleared off as soon as you’re aware of them.

Child support payments are not a joke.  The Attorney General can put negative items on your credit report that effectively render a delinquent child support payer unsuitable as a borrower.  Remember government liens, whether personal or on a property, are the highest liens.  Occasionally, you may have to work very hard on getting a back payment status corrected.  The AG is not under the same Federal rules as normal creditors are.

Help

You may need help getting a credit report accurate and negative items taken care of.  First, visit Henley Credit Law and sign up to take the free on-line credit course to understand better how things work and what you can do.  We have also worked with many credit counseling and credit repair companies over the years and can offer some advice about what the best approach is.  Ask us.

Second, after you have seen what’s on your credit report and decide how to proceed, consult a lender.  Some lenders, especially mortgage brokers, have access to tools to help you sort through which negative items should be paid off first and how much money you’ll need to repair your credit.  Most lenders will even supply you a free copy of your credit report with scores on it.  Your free credit report through the government website may not have scores on it, and the paid credit reports offered by some bureaus may not have a report suited for mortgage lending.  People have told me on occasion that their score is 700, only to find out that it was 675, because a different scoring model is used for different creditors.