Understanding the Credit Landscape

 

By Erin Carvelli

Learn about the intricacies and differences between credit scores and your credit report along with some tools and tactics for managing each in this article from Erin the Expert.

Credit Reports & Credit Scores
Understanding the Difference
Many people do not understand that there’s a difference between your credit report and your credit score. A credit report is a repository of an individual’s credit profile, maintained by the three credit bureaus: Transunion, Experian and Equifax.
 
The credit report contains a listing of the following:
  • Listing of all businesses extending loans and credit
  • Initial loan amounts (or credit limits)
  • Current balances
  • Payment history, i.e. payment amount and if the account was paid on time or late
  • Hard Inquiries (more on this later)
  • Previous addresses
  • Employment history
  • Credit blemishes (aka as derogatories) such as late payments, collections, bankruptcy and foreclosure
Let's get back to credit scores. Credit scores are formulas that use information on your credit reports maintained by the 3 credit bureaus that we mentioned before. A score is rendered for each that identifies the quality of your credit profile for particular purposes.
 
There are many scoring models, but the two main methods are FICO and Vantage. FICO is the scoring model used by the mortgage industry, specifically Revision 9 which was introduced in 2017. FICO9 includes trended data, which is a historical analysis of credit payment “behavior”. Vantage, on the other hand, renders different scores than FICO. This model weighs different aspects of your credit report.
 
Although services like Credit Karma give you your Vantage score, these scores are not valid for mortgage qualification. The best way to be proactive and ensure the highest credit score possible is to monitor and manage your credit reports as there can be inaccurate information -It’s best to clear up any errors quickly.
 
How can inaccurate information end up on your credit report?
Some typical examples include:
  • Common and family names (example: John Smith and John Smith Jr.)
  • Collections you’re unaware of such as: medical and fraudulently opened accounts
The only way for you as a consumer to get an accurate report directly from the three bureaus at no cost is through FreeCreditReport.com.  This is the only site approved by the federal government and it allows you to obtain your reports on a yearly basis.
 

 

Misunderstandings & Realities of Credit Scoring

In this last segment, I address a few of the most common misunderstandings about how credit relates to the mortgage process.
 
#1 One of the most common questions asked is, “My scores are bad, but my wife's are good… can you just use hers and ignore mine?”
 
Unfortunately, no. I must use the lowest of the middle score of all borrowers. Each borrower has three scores.  I take the middle score of each borrower and then use the lowest of these scores for mortgage qualification purposes. This is a federal guideline (there is no way around it). It’s important to understand that a borrower’s credit score will impact the programs available and rate Greenway can offer.
 
#2. “I was late paying my $12 GAP bill. What’s the big deal?” 
 
In this circumstance, the amount of payment is not relevant. Magnitude not relevant. It’s the fact that you didn’t pay on time. One 30-day late payment will reduce your score by up to 110 points, regardless of how much you were late paying.
 
Here's how some other derogatories will ding your credit score:
  • Collections: -200 points
  • Maxed Credit Card: -45 points
  • BK: -240 points
  • FC: -160 points
Clients often say…“I’ll just pay off my collection and that will get my score back.” No. The scoring model looks at history too. Once you pay it off, it will remain on your credit report for quite some time.
 
The only way to keep your credit report clean is to be responsible and timely with your credit over the long term.
 
 
#3: “I have no credit cards and no debt. Why is my credit score not 850?”
 
We call this a Thin Credit File, which is little or no credit history. It’s important to rember that the scoring models look at credit behavior over time. So, no credit does not mean good credit. You have to build a track record of creditworthiness.
 

 

In this last section, we will cover the tools and resources available to assist you with credit related issues. First, let’s touch on Soft and Hard Inquiries.
 
What are Soft Inquiries?
It is a snapshot of your credit score when it is pulled. With a soft pull, your scores are not protected and not useable for originating your mortgage. When you’re ready to move forward with an application a hard inquiry (or "pull") is done. The good thing about soft pulls is that they have no impact on your credit score and they do not generate an inquiry on your credit report.
 
What are Hard Pulls?
A hard pull does have an impact on your score and can lower it by up to 3 points. It does create an inquiry on your credit report, but your score is protected for 90 days.
 
What does a protected score mean?
This means any activity on your credit report in the 90-day window will not affect your score as far as mortgage qualification goes. However, it’s important to note that the credit report itself is not protected, which means new accounts, payments and collections will show up on your credit report. Though they will not impact the protected credit score, they can adversely affect your qualification as they factor into liabilities and ratios such as DTI and cash to close requirements.
 
Trigger Leads Explained
Greenway Mortgage uses soft pulls to not only prevent a 3-point hit to your credit score, but to protect you from becoming a trigger lead. When a mortgage lender (like Greenway) “hard pulls” your credit from any one of the three credit bureaus, your information is transmitted to them and your credit information is returned. What's concerning is that credit bureaus are selling the fact that you're shopping for a mortgage to other lenders...LOTS of them. Even though Greenway does not send your email or cell number, the bureaus use big data to ascertain both. Suddenly you're inundated with calls from many lenders.
 
I do not dissuade clients from shopping around, who you work with is up to you, but I would hope that you choose to deal with a trusted professional, not a telemarketer. The issue is that, until recently, there was no way around this. We must run your credit in order to determine qualification. Although we usually run only one bureau up front, we have to run all three once you have a loan in process. Every time we add another bureau, a new wave of trigger lead calls would hit.
 
Now that we have the option to a soft pull up front without generating an inquiry, this gives you time to get on the Trigger Lead do not call list at OptOutPreeScreen.com before we have to do a hard pull.
 
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