Thursday, March 24, 2011

Monitoring, Improving and Repairing your Credit for the Purpose of Obtaining a Home Mortgage

In the aftermath of the mortgage meltdown, the management of your credit profile is more important than ever.  The standards for the approval of all forms of credit have tightened necessitating that consumers pay close attention to their credit records and credit scores.

What is a Credit Score:  Sometime called a FICO score, this is a mathematical number that is computer generated that attempts to measure the degree of risk associated with your creditworthiness.  There are three competing credit reporting agencies and each has their own unique algorithm but the mechanics of each is very similar.
Credit scores range from 300 to 840. The chart below shows the ranges and the associated ratings. For mortgage purpose, a conventional loan will require a score over 700. A FHA loan will require a score over 580. FHA may insure a loan as low as 500 with a 10% down payment. Conventional loans with less than 20% down and mortgage insurance often require a score over 720.

Improving your score or maintaining a good score:

The Following recommended actions will have a beneficial effect of your credit score:
Ø      Pay your bills on time.
Ø      Do not max-out your credit cards or routinely make minimum payments.
Ø      Do not apply for credit unnecessarily. This is a common mistake especially at retailers who offer 10% off on an initial purchase.
Ø      Do not cancel cards where you have an established credit history.
The following actions will have a harmful effect on your credit score:
Ø      Maxing out your credit cards and making only the minimum payment.
Ø      Paying bills late or allowing them to go to collection or judgment.
Ø      Having a large number of accounts with large balances.
Ø      Repeatedly applying for new credit.
Ø      Co-signing another person’s credit agreement may harm your score.
Ø      Bankruptcy, auto repossession of foreclosure.
Fixing Credit Problems:

Time Heals all wounds:  The passage of time affects your credit score in two ways. The longer you have a satisfactory relationship with a credit provider, the more it raises your score. That is why you should not cancel a card that you have had for a number of years.  If the card has a fee that you wish to avoid, perhaps the grantor has a no-fee card as well.  Secondly, as derogatory credit entries get older, they impact the score to a lesser degree  A late payment has practically no effect after a year, a foreclosure after 4 years and a bankruptcy after 7.

Fix the Mistakes: An alarming percentage of credit reports have mistakes that reduce the score. You can get a free printed copy of all three credit reports once a year, or more often if you have been denied credit.  Go to to order by mail, phone or immediate download. If you elect immediate download, you will have to answer questions about current creditors and balances in order for your identity to be established. You have to do the process three times to get all three reports.

You can dispute any credit report in writing, by phone or over the internet. Once disputed, the derogatory item will be deleted while it is under investigation. Once the investigation is complete it may be reinstated if shown to be valid.

Don’t ignore Delinquencies: If you have a delinquent account, talk with the creditor and try to work out a payment plan or a reduced payoff. Once the creditor turns it over for collection they no longer own the account and can’t help. A delinquent that is satisfactorily resolved will have a reduced impact of your score.

Try to Negotiate “judgment or Collection” Items: Delinquent accounts are sold to companies who specialize in collecting delinquent receivables. They often buy the accounts for a very small percentage of the balance and will sometimes negotiate a reduced amount. Do not allow accounts to go to judgment because it will remain effective for 12 years.  In Maryland you can search your records for judgments at  If you satisfy a judgment, make sure the creditor files a release or write the Clerk of the Court with evidence of Payment.  In Baltimore City civil judgments can be occur at the district court level and sometimes the borrower has little or no notice.

Do not use Credit Repair Services: These firms simply dispute all the derogatoriness in your file in the hope that some of them will be deleted.  You will be charged for a service that you can perform yourself. If you need credit counseling contact Money Management International, a nonprofit nationwide credit counseling agency that receives support from the government. Often their services are free.  Contact them at

Debt Relief Companies:  These Companies negotiate debt reduction on your behalf with creditors, consolidate your monthly payments into a single payment, and keep a portion of the monthly payment as their fee. These companies should be approached very cautiously and don’t be swayed by exaggerated claims of success.  Check them out with the Better business bureau or some other trusted referral source. 

Qualifying for a Mortgage Despite Credit Issues:

If you suspect you may have credit issues, you need to examine your credit reports and correct errors as a first step. Next, you need to get your actual scores. If you think you are OK, contact a loan officer at a lender and have them run your scores. You will have to give them your Social Security number and written authorization. Do it for all prospective owners. There may be a small charge. If you find that your scores need improvement in order to qualify, you have two choices.

1)      Follow the credit improvement practices outlined above and reconnect with the loan officer in say, 6 months.
2)      Subscribe to a credit monitoring service that will give you your scores periodically along with a report of changes to your report. There is a fee for this service that ranges from $12-17 per month. There is usually an initial free period that can be as short as 7 days after which you remain obligated for the minimum subscription period which can be as long as a year.  Read the fine print carefully. Here’s a comparison of several sites.
Only Identity Guard gives all three scores. The frequency of score update varies widely from one service to the next. Pick the one that best meets your needs.

Using a Broker or a Direct Lender:  Mortgage Brokers are intermediaries between borrowers and lenders. They do not approve loans. Highly experienced brokers can sometimes assist credit challenged borrowers find the right match from among the various lenders with whom they do business. Increasingly direct lenders are funding a higher percentage of loans than in the past. This is due in part to the mortgage crisis where, perhaps unfairly, mortgage brokers were blamed for a larger percentage of the bad loans.  Some banks are no longer accepting brokered loans and giving closer scrutiny to those they do accept.  Credit challenged borrowers who decide to apply to a direct lender should solicit the advice of their Realtor regarding who is most likely to give the application a fair review.  There is considerable variation between one lender and another regarding credit qualifications.

When is a Pre-Qualification not a Pre-Qualification?:  Most Selling Realtors today require a mortgage pre-qualification letter to accompany a purchase contract. Please remember that a Pre-qualification letter is not a loan approval or loan commitment. All it says is that the Loan Officer has looked at the credit scores and done some very preliminary mathematics on income and monthly payment and feels that the loan is probably approvable. Unfortunately some aggressive loan officers hand out pre-qualification letters like business cards in an effort to take a prospective borrower “off the street”.  As a minimum, the loan officer should pull all three credit reports and scores, examine any derogatory comments, compute the monthly payment and compare it against monthly income and total debt. This is not a big undertaking on the loan

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