Written By: Glenn Michaels, Op-Ed Writer
For many years credit scoring was not present and the analysis of an applicant’s credit report was very subjective. The review was often loaded with cultural biases and had no rhyme or reason.
The credit bureaus then developed a mathematical formula called “credit scoring” to determine the credit worthiness of a debtor and the possibility of default along with the reasons for what went into the credit score. Credit scores range from a low of 350 to a high of 850.
When “Subprime” lenders (hard money) were in the mortgage business they often determined the mortgage program and rate based on the credit score. In fact, they often said “the score is the score” and based risk, pricing, and underwriting around the credit score in use.
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Applicants for a mortgage loan normally have three scores, one from each credit bureau. The lender uses the middle score to determine the credit score that will be used. In some cases there will be two scores and the lender will use the lower of the two scores to be used.
During the “subprime” era institutional investors used the credit scores differently. Some used the highest of the three scores; some used the lowest of the three scores and most used the middle of the three scores.
Today, there is no “subprime” but lenders still review applicant’s credit scores as one of the determining factors in approving a mortgage applicant. FHA requires 10% down for all applicants with a credit score of 500 – 579 if you can find an institutional investor that will follow HUD’s minimum score requirements.
In today’s market many applicants have mortgages owned by Fannie Mae and/or Freddie Mac and want to do a HARP refinance. The credit score helps determine the interest rate the borrower will receive.
Credit scores can change weekly based on recent credit patterns, spending habits, credit inquiries, and public records. Applicants can also influence their credit scores by writing to each bureau with errors and credit disputes found in a credit report. It is very important for everyone to obtain a copy of their credit report annually to make those corrections.
When a person contacts a credit bureau with a credit error or is disputing a credit item shown on their credit report, the credit bureau(s) have thirty days to investigate and correct the credit item or they must remove the item(s) from a credit report. The credit item(s) in dispute or in need of correction may influence the determination of the credit score.
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If a person was a victim of identity theft, then the victim should also inform the three credit bureaus that they were a victim of identity theft so this can be inserted in your credit profile.
If you are going to make a major purchase or buy a home or refinance a mortgage in the near future it is a wise move to obtain a copy of your credit report and to contact the bureaus of corrections and insert any disputes in your credit profile. Scores change weekly and your influence can make your scores increase since the credit bureaus often cannot investigate and correct items in your credit profile in thirty days as federal law requires. In cases where the credit bureaus are unable to investigate and correct within thirty days they must remove it from your credit profile.
If you time this right you could increase your credit score by fifty points which could save you money and increase your buying power. Do not hesitate to obtain your annual free credit report and to correspond to the credit bureaus regarding errors, disputed items and any identity theft.
About The Author
Glenn Michaels - As an op-ed writer, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years.
