PL  |  NL  |  FR  |  ES  |  PT  |  IT  |  DE  |  DK  |  NO  |  SE  |  FI  |  GR  |  JP  |  CN  |  KR  |  RU  |  AE

  Report this article

More information

Where to Locate Responsible Debt Management Programs Online

How to Eliminate Debts Through a Settlement Process

How the Recession Created Very Favorable Debt Settlements

Too Much Credit Card Debt: How to Find and Compare Debt Relief Programs Online

How to Find Free Credit Card Debt Help Online

Credit Card Debt Settlement Rates Have Crossed 30 percent

Legal Tactics to Eliminate Your Credit Card Debt

How to Legally Reduce Debt and Avoid Bankruptcy

Where to Find the Best Debt Reduction Programs

Pros and cons of buy here pay here car dealerships

Legal Ways to Avoid Paying Back Your Credit Card Debt

Important Advice For Finding Legitimate Debt Settlement Programs

Because credit scoring is relatively new, there are also common misunderstandings about what scores can and can’t do.

When a loan officer pulls a credit score, the officer is actually pulling three scores, one from each bureau. Some falsely think that these scores are added together and then averaged. Not true. In fact, lenders will throw out the highest score and the lowest score and use the middle one.

There is a reason for doing this. The three credit bureaus are lo cated in three distinct regions of the United States. If an individual has lived all of his or her life in Oregon, for instance, all of the credit data will be limited to businesses and transactions in that section of the country. In this instance, TransUnion would carry most of her credit information, but Equifax in Atlanta wouldn’t have as many entries. That’s why even though all three bureaus use the same FICO engine, they’ll almost always have different scores.

I’ve seen credit reports where one score was 760, the lowest score was 620, and the middle score was 680. In this case, a lender would use 680. By using the middle number and not the highest and the lowest, lenders feel they can get a better picture of a borrower’s credit profile. As the loan officer, you will know the middle score is used for loan underwriting regardless of whether a bank or a wholesale lender is looking at the score.

If the client is using another person as a co-borrower for a mortgage, such as a spouse, friend, relative, or a business partner, then what number do lenders use? Each person on the application also has three numbers. If one person’s middle score is 770 and the other person’s is 570, what happens then?

Lenders won’t average the scores. They have to consider the lower score just as much as they would a higher one. But the irony here is that a high score won’t compensate for a low score, but a low score can kill a deal.

In the case of multiple borrowers on one application, lenders will use the score of the borrower who makes the most money. If the person with 770 made $5,000 per month and the person with the 570 number made $10,000 per month, guess what? The score for loan purposes is 570, not 770. Conversely, if the 770 made $10,000 and the 570 made $5,000, the lenders will use the 770 score. But what if the incomes aren’t that much different, or in many cases, almost the same? That’s when the bad score can really hurt. There’s no way around it for loans that have low scores.

Because a single event doesn’t dictate a credit score, paying off any negative credit items won’t immediately affect a score. For example, consider what happens if your client’s FICO score comes in at 620 but your client needs 630. When you review the credit report, you discover a recent collection account that hasn’t been paid. Your client mistakenly rushes to the collection agency, pays the debt, then documents the transaction, and waits for the new score to be calculated. Guess what? Little or no change. In fact, the score could actually drop a little because there was new activity on the collection item.

There is considerable confusion regarding credit scores and rates. There is no one-on-one correlation between a score and a rate for conventional or government products. If your clients are approved for a conventional Fannie Mae loan and their credit score is 600, you shouldn’t be getting a much higher rate if under the very same loan program another borrower has a 700 score.

In fact, many websites make this mistake and actually post what rate your clients would likely get if the credit score was such-and-such. A chart on a popular website makes such a claim.

This chart shows that if the FICO score were 620 to 639, the borrower’s interest rate could be 7.00%, but a score from 640 to 659 could command 6.45%. That’s a drop of more than a half of a percent. On a $200,000 mortgage that difference in rate is about $73 per month, or nearly $9,000 over the next ten years. Still further, the table shows a rate of 5.41% if your borrowers are lucky enough to have a score over 760. That payment goes to about $1,124, or about $206 lower than the 7.00% rate.

But having closed thousands of mortgage loans, I can tell you that’s not how it works, and I think too many potential clients simply don’t apply for a loan if they see that their scores will cost them $200 more each month.

Although in general it attempts to explain the importance of credit scores, such information makes two false assumptions:

1. A simple one-point change in a credit score can affect an interest rate by half a percent or more.

2. Credit scores are the only determining factor when handing out interest rates.

Some loan programs lend under different guidelines than conventional or government programs. Sometimes private lenders make these unconventional loans because they intend to keep rather than sell them.

Other times, subprime lenders make these loans, and the borrower’s credit score is in fact the determining factor in rate.

So the method of applying a rate with a particular score works with a smaller part of the available loan choices. Fannie Mae, Freddie Mac, the VA, and the FHA work with nearly 80 percent of the mortgages available in the marketplace today, and such rigid scoring considerations simply don’t apply to those loans. Claiming that if the score were 639 instead of 640 means that the payment automatically goes up by $70 on a $200,000 30-year mortgage is nonsense.

Again, although there are specific loan programs that might require a particular score, scoring alone is rarely the single determining factor. I recall a client a couple of years ago that applied for a refinance. His ratios were a little high, around 45 percent for the housing ratio, and he didn’t have much money in the bank so his liquid asset count was marginal. His credit score was low: 580.

If the online charts were correct, this person would not even get a rate quote because his score was so low. If he had paid attention to score claims, it’s likely he would have never even applied for the refinance and lowered his monthly payments. But he got approved anyway, and he got an interest rate typically reserved for those with 760 or above scores. He got the exact same points and fees as another client who had a 785 score.

This gentleman’s loan was $185,000, although his property was worth about $650,000. Thus he had a 28 percent loan-to-value (LTV) ratio. The AUS took his considerable equity into consideration and he got the best rate available. On the other hand, if this borrower’s property had an appraised value of only $200,000, it’s doubtful he would have gotten the loan—his LTV would have been 92.5 percent. The credit score was extremely low, but other factors played into his approval, and he got the loan he wanted.