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Credit Ratings: An Explanation (Information was obtained by Fannie Mae and NAR) Credit scores and automated underwriting help open the door for homebuyers to obtain the home of their dreams. The scores provide lenders with useful information when making a decision to approve a mortgage application. They also speed up the loan decision process and ensure that decisions are made fairly and objectively. The following questions and answers, excerpted from a Fannie Mae/NAR brochure will help you understand credit records, credit scores and how both are used to influence your ability to finance a home. What are credit scores and how do they affect homebuyers? Credit scores are a statistical tool for predicting the likelihood of a consumer paying back a loan. They are one of several important sources of information a mortgage lender uses when evaluating a mortgage application. They may also be used to determine what interest rate the qualifying homebuyer may be offered on the mortgage. What types of credit scores are used in the home buying process? The most commonly used credit score in the home buying process is the Fair, Isaac and Co., Inc., credit bureau score, known as a FICO score. A FICO score is computed and calculated from the information in a homebuyer's credit record. What factors are used to determine a credit score? A credit score is based on information in a homebuyer's credit records, such as how the individual has managed debt and credit accounts in the past. Computer programs generate a credit score by analyzing a number of factors in the credit record, including a homebuyer's record of paying bills and loans; if the homebuyer has paid bills on or before the due date; any public records the homebuyer may have; how often the homebuyer has applied for installment loans and new credit cards; how much credit the homebuyer is using; and how much a homebuyer actually owes. Characteristics such as race, gender, marital status and national origin are not used to calculate a credit score. Do certain factors increase or decrease a homebuyer's credit score? An isolated action usually would not impact a score because a homebuyer's score reflects credit patterns over an extended period of time. However, there are things a homebuyer can do to improve a credit score, including paying bills regularly and on time, keeping credit card balances low and applying for new credit sparingly. Some factors that can negatively affect a homebuyer's credit score are delinquent payments, collections and high outstanding debt. What is an "inquiry" and what is the impact of multiple inquiries on a homebuyer's credit score? An inquiry is a creditor's request for a copy of a consumer's credit report - this request appears as an "inquiry" on the report. Consumers looking to buy a home may contact a number of lenders to find the best interest rate, generating multiple "inquiries" on their credit reports. These multiple inquiries during the home buying process have the potential to negatively impact an applicant's credit score, though the impact is likely minimal. How are credit scores calculated? Credit scores are calculated by assigning points for different pieces of information that collectively provide a good prediction of future credit performance. FICO scores are ranked on a scale of approximately 300 to 900 points. Borrowers with higher credit scores are statistically proven to perform better than borrowers with lower scores. Do mortgage lenders consider factors other than credit scores when reviewing the mortgage application? Yes, other factors considered include: amount of savings; type of loan the homebuyer is requesting; value of the property being purchased; and amount of down payment, among others. What information can homebuyers obtain about their credit scores? Some lenders choose to tell homebuyers their scores; others may not. Though lenders are not required by law to disclose a homebuyer's credit score, they are required to provide the reasons a homebuyer was turned down for a mortgage, such as a high-risk credit record. Homebuyers can use this type of feedback from lenders to focus on improving their credit scores. Are credit scores fair? Yes, and for good reason. Credit scores are derived exclusively from information that is directly related to credit repayment. Numerous published studies confirm that credit scores are very good predictors of whether a borrower is likely to default on a loan. What should homebuyers do if they find mistakes in their credit report? What are the rights of homebuyers? It is important that homebuyers review their credit report at least once a year with all three credit reporting agencies to make sure they are accurate. If you believe that any one of the credit reports contains mistakes and wish to dispute or correct the mistakes, you should contact the company that provided the report with the errors. Under the Fair Credit Reporting Act (FCRA), the company must investigate items under dispute within 30 days. The consumer will also receive written notice of the results of the investigation within five days of its completion, including a copy of the credit report if it has changed based on the results of the investigation. If homebuyers correct erroneous information on their credit reports, will their credit scores change? If so, how quickly? Yes, they will change. Depending on how important the corrected information is to the homebuyer's overall credit record, a correction may cause a credit score to change. Making changes to credit reports can sometimes take up to 6 months. What should homebuyers pay attention to in order to improve their credit scores? Homebuyers should remember to reduce their credit account balances below their credit limits, reduce their debt and review their credit reports regularly. It's also important for homebuyers to pay their bills when due consistently, use a limited number of credit cards and keep their overall debt at a reasonable level. What should a homebuyer do who has no established credit? A lender can use alternative ways to evaluate credit, such payment histories for rent, utilities and other recurring obligations. What resources are available to homebuyers to assist them in managing their finances and restoring their credit so they can buy a home? Contact the Consumer Credit Counseling Service in Fort Collins (970) 424 2227 or in Colorado Springs at (719) 598 2227; or the U. S. Department of Housing and Urban Development (HUD) in Denver at (303) 672 5440. Check the Yellow Pages or the Internet for "credit counseling", "debt counseling", "consumer credit counseling service" or "home ownership education". To order a free credit report, you can call 1-877-322-8228, write to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281, or www.annualcreditreport.com. You can order a report from all three credit reporting agencies at the same time, or just one at a time. You must provide your name, date of birth, Social Security Number, and current and previous addresses within the past two years. There is a fee if you want your credit score, otherwise once a year, you are entitled to a free credit report. Score 700-850 - smooth loan process; best interest rates Score 550-699 - medium risk; higher interest rates Score 300-549 - no loans or credit cards Credit Reporting Agencies Equifax Credit Information Services P.O. Box 740256 Atlanta, GA 30374-0256 Phone: (800) 685-1111 Web Site: www.equifax.com Trans Union National Disclosure Center P.O. Box 390 Springfield, PA 19064 Phone: (800) 888-4213 Web Site: www.tuc.com Experian National Consumer Assistance Center P.O. Box 949 Allen, TX 75013-0949 Phone: (800) 682-7654 Web Site: www.experian.com Print This Page                                                                                                                                             Return to Top of Page Buyers Best Choice is a True Personal Service Real Estate Agency located in Colorado. Web Design by Amaasing Designs