Credit Report Options
Credit Report Options
Anyone who has applied for a home loan probably has some familiarity with the importance of having a strong FICO score. FICO stands for Fair Isaac Company. There are three major bureaus that provide credit information (Experian, Equifax and TransUnion). These bureaus got together and created a competing score called the VantageScore. CreditKarma explained, “The VantageScore offers additional features, such as predictive scoring and a 24-month review of credit history, that the classic FICO model doesn’t incorporate.” For a comparison of the Vantage Score to the FICO score, click here.
This new score has a different scale. Experian, Equifax and TransUnion used a score that ranged from 300 to 850. This new VantageScore has a range from 501 to 990. This has led to some confusion as to how these scores compare. Lenders usually charge consumers to check their credit. They obtain the three scores from the major bureaus and generally use the middle score to base the lending rate that they offer the borrower. Some lenders have begun to use the VantageScore. For more information see: What Credit Scores to Mortgage Lenders Use?
Borrowers may want to obtain their score in order to repair any issues prior to applying for a loan. This can cost them around $20 if they want to receive a full Equifax or TransUnion score. Experian does not offer reports to consumers.
There are some other free options for credit reports. These include:
CreditKarma.com – Offers a TransUnion Transrisk and Vantage Score report.
CreditSesame.com – Offers Experian National Equivalency Score
Credit.com – Offers Vantage Score
While many sites offer different reporting options like these, they may not show exactly the same scores that the lender will obtain when they receive all three major bureau reports. Consumers, who apply for a loan and have paid to have their credit checked, can ask for a copy of their credit report from their lender.
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Basics Every New Home Buyer Should Know
It may not be as easy to purchase a new home in today’s real estate market. I teach real estate courses, I have a real estate license, and I spent years working in the lending industry. Because of that, people often ask me about what a home buyer should know about the process.
When I was a loan officer, the market was considerably better. First time home buyers had more options. Currently banks are hesitant to lend and buyers need to come up with more funds on their own. In the past, it wasn’t unusual for banks to lend at least 95% of the cost of the home. Now it isn’t unusual for banks to only cover 80% of the cost. FHA loans offer higher percentages but the amount you can borrow is limited.
Getting the Loan
As a loan officer, I did a lot of first time home buyer seminars. At those seminars, people had a lot of questions about the home-buying process. A big part of what they wanted to know was how their credit score affected their ability to get a loan.
A person’s credit score is extremely important in the loan process. The score alone does not dictate whether you will get the loan, but it is a big piece of the puzzle. Banks will also look at your work history, income and how much money you have for the down payment.
If you have a poor credit history, it doesn’t mean that will hurt you forever. As time goes by, your poor credit history fades if you do the right things and is replaced with good payment history. Your credit score should not vary that much from month to month. However, if you have had late house payments in the past or a bankruptcy, it can drop your score more quickly than other things. Improving your score takes longer than hurting your score. It isn’t common under normal circumstances for a score to change 20 points in a few months’ time.
That is why it is important to periodically check your credit report and contact the credit agencies if there is incorrect information on it. There are three main credit agencies: Equifax, Experian and Transunion.
If you report an error to these agencies, they must investigate it and respond to you within 30 days. Sometimes certain information will show up on one agency report and not on another. In order to get information removed from all of them, you need to contact all of them. Don’t assume that because you take care of contacting one agency, that the others will be corrected automatically.
Your score is sometimes referred to as a FICO score, which stands for Fair Isaac and Co., the software company that developed the score. In order to have a FICO score, you must have at least one account that has been open for 6 months or longer. Also, there has to be one account that has been updated in the past 6 months. The higher your score, the better risk you are and the more likely a bank will lend you money.
There are 5 main categories of information that are taken into account in determining your FICO score:
•          Payment history accounts for about 35 percent of the score. Do you pay your bills on time? Are there any collections or bankruptcies? Bankruptcies will stay on a report for seven to ten years, depending on the type.
•          Amounts owed accounts for about 30% of the score. How much do you pay on your accounts? How high of a balance do you have? How much of the credit granted do you actually taken advantage of?
•          Length of credit history accounts for about 15%. How long have your credit accounts been established?
•          New credit accounts for about 10%. How many recent requests for credit do you have?
•          Type of credit accounts for 10%. What kind of credit mix do you have? Do you have credit cards, retail cards, mortgages, etc? You don’t have to have all types, and it isn’t a good idea to have accounts that you don’t use. However, it is worse to close an account that you don’t use than to leave it.
Here are some tips you can use to raise your credit score:
•          Pay on time.
•          If you missed payments, get current.
•          Paying off a collection doesn’t remove it from your report, though it does improve your score.
•          Contact creditors if you are having trouble making payments to see if they can help you.
•          Don’t maximize how much you take out on your accounts. Keep balances as low as possible.
•          Don’t move debt around unless it means you’ll be getting a lower interest rate. You still owe the same amount of money.
•          Don’t think closing unused cards will raise your score.
•          Don’t open a lot of cards just to have available credit.
•          Don’t open too many new accounts too quickly.
•          If you have had problems, re-establish new credit history.
•          Check out your credit score from time to time.
•          Only get new credit cards as needed.
•          Manage the cards you have responsibly.
•          A closed account will still show up on your credit report.
When people came to me to apply for a loan, I would ask them if I could run their credit. That is what you can expect a loan officer to do as well. They have to know what your credit is in order to know if you will qualify for the loan. Although many people are worried that their credit will affect their credit score, one inquiry will take less than 5 points off of their score. Rate-sopping can cause multiple requests on a report, but as long as the inquiries are within a 14-da6 period, it will only count as one inquiry as far as points taken off. Also the score ignores all inquiries made during the 30 days prior to scoring, so if you find a loan within 30 days, those inquiries will not affect your score while you are shopping.
What is a good score? Traditionally lenders usually liked to see at least 620 to get better rates. Scores over 700 sometimes can get even better rates. If your score was under 620, you could still get a loan, but you would pay a higher interest rate.  The numbers change as programs change, but it is a good idea to try and keep scores as high as possible.
Once you get into a house and have house payments to make, whatever you do, do not be late on it. That is one of the worst things you can do to your credit. Should you be late with a house payment, the next time you go for a home loan, the bank is less likely to forget that tardiness than a late credit card payment. Having one late house payment in the last 12 months prior to applying for a home loan can severely affect your ability to qualify for a home loan. If you have a 30 day late payment in the last year, you will have to pay a higher interest rate on your new loan, which could cost you many thousands of dollars. Many lenders offer automatic withdrawal from your checking account. If you have problems remembering to pay your payments, I highly recommend calling your bank and signing up for that service.
Finding the Agent
The first part of the home-buying process is actually getting pre-approved for the home loan. It is only after you have received that, that you can actually start looking for a home. If you don’t have a real estate agent, you might ask your lender to recommend someone.
Another good place to find an agent is by asking friends and family. If they haven’t really had a chance to use anyone yet, you might drive through neighborhoods where you are interested in buying and see if there are any signs up of agents in the area. If you see several signs with a certain agents name on it, it probably means they know the area well and may be a good person to contact.
Remember you do not need to stay with a real estate agent or loan officer that you do not like. You have the right to drop them. They are working for you and if they make you feel uncomfortable or aren’t responsive, you should exercise your right to pick someone else.
The good news about being the home buyer is that the home seller is the one who pays the real estate agent. Your agent will receive a commission for helping you but it will not have to come from you.
Protecting Yourself
There are a lot of things you can do to protect yourself in the home-buying process. Your agent should help you with home inspections and direct you to appropriate insurance agents if you don’t have one.
The Important Things to Remember
Here is the minimum you should know about Home Buying and Renting:
•          If you can afford to buy, there are tax advantages over renting.
•          Understand what constitutes a FICO score.
•          Fix any bad things you have on your FICO score by contacting all 3 credit agencies.
•          Get preapproved for a loan before ever looking at homes.
•          Find a real estate agent through referral or through checking out neighborhoods where you are interested in buying.
•          If you don’t feel comfortable with your agent, get a new one.
•          Remember the home buyer does not have to pay the real estate agent.
•          Protect yourself with home inspections and insurance.
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Need a Loan? Find Out What The Loan Officer is Thinking
It is awfully nice of lenders to be offering free loans. At least, that’s what it sounds like they’re doing. Think of all of the radio and television ads you have heard where the lender claims to be offering loans with no out-of-pocket costs. Have you ever wondered how they can do this? If they are not charging you, the money has to come from somewhere. It helps to clear things up when you understand how a loan officer makes their money.Â
Pay Now or Pay Later
Loan officers get paid in a way that they call “on the front” and/or “on the back.” If a loan officer makes money on the front, that means they are charging for things that you can see. This money is either out-of-pocket or is incorporated into the loan when you sign the papers. These are things like processing fees and other miscellaneous charges that are charged for processing your loan. If a loan officer makes money on the back, that means money is being received from the bank as a sort of commission for filing the loan. This is the money you do not see. (To learn more about loan expenses, read our related article How To Read Loan And Credit Card Agreements.)
When lenders claim to be giving you a “no out-of-pocket” or “no-fee” loan, they are still making money, but they are charging it on “the back.” Although the bank is paying the loan officer this money now, it is really coming from you the borrower in the form of a higher interest rate. Lenders that are not charging fees on the front can be charging a higher rate to make up for lost fees. In fact, the bank could be making a lot more money this way as they are getting a higher rate of interest for possibly 30 years or more. (Learn how interest rates affect change in the housing market, and how you can keep up, in How Will Your Mortgage Rate?)Comparing Loans
How do you compare loans to be sure which deal is the best for you? You need to understand something called the annual percentage rate (APR). When you apply for a loan, the loan officer must give you a good faith estimate. On that estimate, you can find the APR. The APR shows the entire cost of the loan to you on a yearly basis. It factors in what the fees cost as well as the interest rate. By comparing good faith estimates and their APRs, you can get a better idea of what they are charging you.
So is that loan really free? As they say, there is no such thing as a free lunch. You might not be paying money out-of-pocket right now, but either you pay now or your pay later. Many times it is a better deal to pay the fees now to get a lower rate instead of paying a higher rate over 30 years.
What the Loan Officer is Thinking
Remember, loan officers are sales people; they get paid by selling you something. In this case, they are selling you the loan. If they are telling you it is a good time to refinance, you need to figure out how much that loan is going to cost you. To do this, you must consider how many out-of-pocket fees you will be paying, if the loan interest rate is less and if you’ll be in the loan long enough to recoup these expenses. If you are getting a lower interest rate and not paying fees, it could be a better deal than what you have now. In that case, the no-fee loan could be a good idea. (Read The True Economics Of Refinancing A Mortgage to learn more about this concept.)
Be careful of the loan officer who wants to keep selling you adjustable rate mortgage (ARM) after ARM after ARM for the same property. ARMs are a good loan choice for certain people, especially those who know they won’t be in their home or loan for very long. If you are planning to stay in your home a long time, an ARM may not be a very good choice. Loan officers receive money for every loan they make. Therefore, it behooves them to make as many loans as possible. One way to do this is to get people into ARMs that need to be refinanced often. (To learn more about the dangers of adjustable rate mortgages, read This ARM Has Teeth.)
Broker or Bank?
Not everyone agrees on this. Having worked for both, I can tell you that there are good and bad brokers, and bankers. The advantage of using a broker is that they can shop around at the different banks for the lowest rates. The advantage of using a bank directly is that they don’t have to pay the broker. If the broker can find a lower rate, charge the broker fee, and still offer the lowest total rate, then that may be your best choice. You will have to do your homework and compare good faith estimates to be sure. Remember, the loan officer decides how much money they want to make to some extent; they may have some negotiating room. Don’t always expect that brokers are giving you the best rate that they can. They may not be telling you the lowest rate they can offer because by offering the rate they quoted, they may be getting more commission on the back. (Read Score A Cheap Mortgage to learn more about getting the best rate.)
Do Your Homework
Though many loans given by loan officers/banks during the subprime meltdown of 2007/08 ended in foreclosure, you don’t need to be that concerned, not if you do your homework. One of the biggest problems came with letting the lending requirements get too lax. Banks were granting loans to people that they used to deny. Something called the stated loan became more common. People were able to “state” how much money they made instead of having to prove it. Many people stated more than they actually made. Also, underwriters were under pressure to approve loans that may not have made sense because they were in competition with other banks that were approving these loans. Remember, it is all sales in the end.
Conclusion
How do you protect yourself? Do your homework. Shop around. Do not accept the first good faith estimate. Get several estimates. Compare the APR on each one. Go to both brokers and bankers to see what they offer. Be wary of the loan officer that doesn’t ask you how long you will be living in your home. If they don’t ask you questions, they don’t know which loan fits you the best. If you are planning to only be in your home a short time, you might consider an ARM. If you are going to be there for a long time, consider a 30-year loan. Even better, if the day comes and you can afford it, pay extra each month on your 30-year loan and pay it off in 15 years!
by Diane Hamilton, Ph.D