Credit includes all the elements that affect your mortgage rate, and lender credibility of being able to repay your debts. This includes everything reported by credit repositories that lenders and creditors refer to, such as: Your Credit Score and Your Overall Credit Report. From this, lenders determine your Consumer Credit Worthiness. Also for your knowledge, included - How inquiries affect your credit score, What and how B/C - Credit is determined, and the Loan Approval Process:

• Credit Score
• Credit Report
• Consumer Credit Worthiness
• How inquiries affect your credit score
• B/C - Credit
• Loan Approval Process
  

FICOŽ Scores

In the 1980s, Fair, Isaac and Company devised a mathematical model to predict the credit risk of consumers based on information in their credit report.  Today, the Fair, Isaac system -- known as FICOŽ -- is the scoring model most widely used by lenders.  Fair Isaac only gives us pieces of the their scoring model (only about 300 points or so) as follows:  

Credit Report

A document completed by a credit-reporting agency that compiles information about a consumers credit history and current credit status,  that discloses this information (credit cards, previous mortgage history, bank loans, and public records dealing with financial matters). 

Many different formulas are used to calculate credit scores.  As mentioned above, we only have a piece (we also know that persons age 50 and above receive extra points (how many points per age; we don't know). 

There are other credit reporting agencies available that report other items such as: Utilities, Telephone and Communications, and other personal credit histories that don't appear in the 3 main Bureaus below.

Credit Repositories / Credit Bureaus / Reporting Agencies

Consumer Credit Worthiness - Negative Items

ˇ        Payment history - A record of late payments on current and past credit accounts may lower the score.

ˇ        Public records - Matters of public record (bankruptcies, judgments, and collections items lower the score).

ˇ        New accounts - Opening multiple new accounts in a short period of time will lower score.

ˇ        Accounts in use - The presence of too many open accounts can lower the score.

ˇ        Amount owed - 50% or more of balance lowers the score, especially when approaching the credit limit.

ˇ        Inquiries - Whenever a third party orders a full credit report (lender, landlord, or insurer), an inquiry is recorded on the credit report.  A large number of recent inquiries will lower the score.

ˇ        Consumer Credit Counseling Services - Non-profit organizations established to help debtors make payment arrangements with creditors is treated by lenders as a bankruptcy.  (good for credit report, not lenders)

Consumer Credit Worthiness - Positive Items

ˇ        3 or 4 revolving credit cards - with high lines of credit ($10,000+), carrying very low balances < 1/2 limit

ˇ        At least one charge card - (American Express, Diners Club, VISA, etc.)

ˇ        At least one Department Store Card - (Sears, JC Penney, Office Depot, etc.)

ˇ        All tradelines at least 6 months old - and at least one that's more than 3 years old (bank & student loans)

ˇ        At least one "installment" tradeline in good standing - (mortgage, auto loan, or student loan)

ˇ        No derogatory notations - No late payments, all accounts reported as "Paid As Agreed"

ˇ        Very few inquiries -- no more than 1to3 credit report inquiries in a six month period.

ˇ        Length of credit history - In general, a longer credit history is better.

   How inquiries affect your credit score

 Inquiries occur whenever your credit report is pulled.  Each pull/inquiry is recorded on your credit report.

According to Fair Isaac, all three CRAs are now using the same program to calculate inquiries.

There are two kinds of inquiries:

• Soft Inquiries occur when you pull your credit report or when one of your existing creditors pulls your credit report.  Creditors pull your credit when they are checking to see how you are doing credit-wise (looking for potential problems) i.e. just before offering you a limit increase.
  

Soft inquiries supposedly have no effect on your credit score.

• Hard inquiries occur when your credit report is pulled as a result of your applying for new credit.  These count against you.
  
  

When shopping for a mortgage, remember that MTG Brokers Corp. does the comparisons for you, and pulls your credit ONCE - Only Once!

Note:  Fair Isaac changed their inquiries scoring method for those who are auto and mortgage shopping, realizing that numerous inquiries will be made by each car dealer, banker, mortgage broker etc.. before the consumer can make a logical decision on which product he/she will take a loan out on. 

Here are the exceptions made for auto loans and mortgage inquiries:

• An inquiry buffer is in place and all Auto and Mortgage inquiries within 30 days from Scoring are ignored.
• Auto and Mortgage inquiries in any 14 day period count as one inquiry  (this is called de-duplication)

We don't know how many inquiries are too many, although lenders will require a letter of explanation for all inquires made within 30 days of loan origination (maybe more), and often re-pull your credit prior to setting closing.

Go to this link to get an idea of how they score you..very interesting...don't be afraid to play with the numbers!  http://www.myfico.com/ScoreEstimator/MyFicoScoreEstimator.html

       B/C - Credit - an overview

B,C and D Credit Ratings - Risk Grades
Typically, B/C lending refers to imperfect credit borrowers.  Credit score not to be confused with risk grade.  A borrower with a 720 score with numerous late payments may only qualify for "C" paper financing while a borrower with a single late payment with a 500 credit score can qualify for "A" paper loans. 

B - Credit Borrowers

Mortgage Lates - 1 or 2 late payments in the past 12 months reported as 30 days late

Revolving and Installment Credit History - 1 or 2 lates in past 12 mo. reported as 30 or 60 days late

Collections or Charge-offs - NONE

Liens - Minor in Nature

Bankruptcies, Foreclosures - Discharged 24 months ago

C - Credit Borrowers

Mortgage Lates - 30 days late 2 to 4 times, and once over 60 days

Revolving  and  Installment Credit History - 1 or 2 lates in past 12 months reported as  60 & 90 days late

Collections or Charge-offs - Discharged 24 months ago

Liens - Tax Liens etc to be paid at close 

Bankruptcies, Foreclosures - Discharged 24 months ago

D - Credit Borrowers

Mortgage Lates - Various 60 and 90 days late

Revolving  and  Installment Credit History - Numerous lates

Collections or Charge-offs - Usually show a filing within past 12 months

Liens - Minor in Nature

Bankruptcies, Foreclosures - Usually show a filing within past 12 months

Note: each lender has slightly different criteria for "A" , "B" , "C" , "D" score rating

The  main factor for B/C lending criteria is often credit score in relation to the credit risk of the borrower.

Primarily, late mortgage payments reported to the Bureaus result in B/C  lending.  Other late payments effect loan availability but the mortgage history is the greatest concern for the lender who evaluates the risk of receiving or not receiving payments from the borrower.

Note:  Lenders consider "Consumer Credit Counseling Services" to impact credit risk the same as bankruptcy.

The below chart is an example of how a credit score affects a borrows rate

Based on $150,000 home

Posted and updated daily at FICO:  http://www.myfico.com

This chart is based on National Average  (Colorado has rate below National Avg.)

        Loan Approval Process

Credit Report Review

 Lenders base loan types, and rates available to you by your medium score.  

Mortgage Brokers will typically Pull an Experian Report prior to loan origination

It is usually the medium score of the three bureaus (tri-merge).  Pulling just one report saves money in the event a loan is not originated.  A tri-merge is pulled upon origination.

A medium/middle score above 640 is good (660 preferred for a middle score).

A lender may allow 2 late mortgage payments within last 12 months provided those late payments are not recent and a satisfactory situation existed (death or other tragedy such as job loss).  With a high credit score and other debts being satisfactory, we may be able to work around lates. 

Lenders look at all debts reported, how extended the customer is in debt, how old the credit line is, the amount of available credit, and timely-ness of payments, in determining a borrowers loan eligibility.  Also Note:  For a VA Refi, the Department of Veterans Affairs evaluates mortgage late payments only (as far as the credit report is concerned).

Scores as low as 500 may be acceptable if the prospect has adequate to exceptional assets (401(k) savings, stocks, bonds, etc.), long term employment or employment in the same profession, and in overall good standing with all creditors, and has notably demonstrated an effort to rebuild credit.

The lender will take in to consideration the circumstances of the borrower on a case by case basis.

Besides Credit Score, we also look for Bankruptcy, Foreclosures, Liens (1^st, 2^nd, etc.), Late Payments (mortgage and other creditor accounts), Collections, Consumer Credit Assistance, Derogatories, Delinquencies.

Derogatory (Derogs) - Any negative item reported on a credit inquiry.

   Credit Repair Assistance Sample Letters

Dear Experian,

I have paid so&so Co. debt in its entirety and they still show me as delinquent.

Attached is the proof. I have also attached a copy of my drivers license and my social security card along with a copy of a recent utility bill with my home address as proof to who I am.

I would appreciate having these items removed or corrected as soon as possible.

Thank You

OR…..

Sample Dispute Letter
Today's Date Name of Credit Bureau
Mailing Address of Credit Bureau
City, State, Zip

Attention: Consumer Relations

I recently obtained a copy of my credit report from your service and have found the following items to be in error.

EXAMPLES
Item #1: I dispute ABC National Bank account #12345. I have never been late on this account.
Item #2: I dispute ABC Financial Services account #4545. This account was not a charge-off, please delete.

According to Section 611 of the Fair Credit Reporting Act, I am requesting that you’re-investigate those items indicated, and promptly delete any unverifiable, inaccurate, or outdated information from my credit report.

In addition, I am requesting a description of how the investigation was conducted along with the name, address, and telephone number of anyone contacted for information. Furthermore, if there is a change in my credit history resulting from your investigation, I am requesting that an updated report be sent to those who received my report, within the last two years for employment purposes, or within the last one year for any other purpose.

My full name is:_______________________________________________________
My Social Security # is:_________________________________________________
My date of birth is:_____________________________________________________
My home phone number is:______________________________________________
My address is:__________________________ (Ave., St., etc.) APT:____________
City: ______________________________ State:_______ Zip Code:_____________

Please send me an updated copy of my report, and notification that items have been deleted. I will consider 30 days a reasonable time for your re-verification of these items.

Thank you for your prompt attention in this matter.

Sincerely,
Signature: ______________________________