CREDIT REPORTS and Credit Scores Maine Association of Realtors by liaoqinmei

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									         CREDIT REPORTS
               and
           Credit Scores
                       Robert Staab
         rstaab@northeastbank.com
       www.northeastbank.com\rstaab




• “This program has been approved by
  the Director of the Real Estate
  Commission for 3 clock
• hours toward fulfillment of the
  educational requirements for activation
  or renewal of a real estate
• license.




• The Commission is interested in the
  quality and delivery of educational
  programs which are
                       and, therefore
• offered to licensees and therefore,
  welcomes and encourages comments
  regarding program
• subject matter and quality of delivery of
  the program.”




                                              1
               New slides

         • If a slide has red lettering

     • It means it is a change since this

      • Program was originally written




    This is constantly evolving
• I started writing this course by reading
  three books on credit and credit scoring
• Many of the changes in this course have
  come about from situations I have run into
  during the process
• Please don’t hesitate to ask questions as it
  will only make this course better – any
  question on Lending is acceptable




     What we will cover today
• Why is it so important to the mortgage
  loan process
• Why is it important to your entire life
  How i it calculated
• H    is     l l t d
• The long term costs of bad credit
• How can you improve it or fix a report
• Some myths you may of heard

                                             6




                                                 2
             A Little History
• Back in the early 1980’s
• It took two to three weeks to get a credit
  report.
  The      dit       i had to ll d
• Th credit agencies h d t call and
  manually create the report
• And then mail it to us – there were no fax
  machines either




                Bad Credit
• Was almost non existent
• Credit card balances were usually less
  than $1,000
                t                    id d
• A car payment over $250 was considered
  excessive
• Any payments over 30 days late was a
  good reason to deny the loan




             Credit Scoring
• Started showing up in late 1992

• Most lenders ignored it until the late
  1990’s
  1990’

• Larger banks started using it first – then
  Fannie and Freddie




                                               3
               Importance

• It has become one of the most important
  things in someone’s life after their social
  security number

• And unlike a social security number it
  changes almost daily if you use credit




 How Credit Scores Affect You

• Auto insurance companies use them to set
  your rates
  Credit     d
• C dit cards use th      to decide h t
                     them t d id what
  interest rate to charge you
• Mortgage rates have a credit score
  component
• Employers use them to decide whether to
  hire you or not.




       Mortgage Underwriting
• Most mortgage underwriting is now
  automated.
• 32 different criteria
  Cash
• C h reserves or d               t d
                      down payment and
  credit scores are the two most important
  items of a mortgage
• The difference between a 600 credit score
  and a 700 credit score




                                                4
              Advantages
• Before credit scoring the max total Debt to
  income ratio of 36%

  Now th automated systems will go t
• N   the t     t d    t       ill   to
  50% for someone with a high credit score

• The higher the down payment and/or
  credit score then higher the ratios can be




• It will allow for someone who has been self
  employed for less than two years to get a
  conventional loan

• Before credit scoring we needed two full
  years of tax returns for self employed
  borrowers




• Credit scoring will over look the occasional
     day late
  30 d l t payment     t

• Unlike the old rigid system it does have
  some forgiveness




                                                 5
    What is on the credit report
• Credit accounts (trade lines to us). Which
  ones you have – how long you have had
  them – how much is owed and how well
  the payments have been made

• If the customer generates a credit score
  there are no minimum number of trade
  lines needed




        The biggest problems
• Public records – Bankruptcies, tax liens
  and judgments

• Old tax liens especially need to be cleared
  before a closing – quite often they have
  been paid but not cleared.

• It costs money for the agency that has
  been paid to report to the credit agencies




 Two Different Credit Requests
• Requests to view the clients credit – there
  are two types of requests. A hard request
  and a soft one.

• A hard request (something the client has
  requested) counts against their score

• Soft credit hits do not




                                                6
              Soft Inquires
• Happen more than you think
• Credit card companies look into your credit
  at least once per year – more if you are
  just paying the minimum balance – most
  now do it quarterly
• This is how they determine whether to cut
  your credit limit in addition to changing
  your interest rate




       Three Different Scores
• Mortgage reports are the only ones who
  use three different scores

  For     i l borrower th middle score is
• F a single b            the iddl      i
  used for all pricing calculations and
  qualifying

• For multiple borrowers the LOWEST
  middle score is used




 How is the credit score calculated



• Different lenders have different criteria in
  h    the       is l l t d bigger
  how th score i calculated – bi
  companies and agencies can set their
  own parameters called layering.




                                                 7
       Different Types of Credit

• Create different scores
• If someone applied for a car loan, credit
      d   d house l
  card, and a h           the       instant
                     loan th same i t t
  the scores would be very different
• Free Credit Report . Com is not
  representative




                 Triggering
• When a borrower applies for a “tri-merged
  report
• The credit bureaus sell the fact that they
  are looking into the possibilities for another
  mortgage to other companies
• This creates calls to your clients from
  other lenders




    Credit Score Effects on Pricing
         • 75.01 to 80% Loan to Value
•   740 – 999 .25 points
•   720-739      .50
•   700-719      .75
•   680-699      1.25
•   660-679      2.75
•   640-659      2.75
        • This is for conventional loans




                                                   8
                  Pricing
• The previous slide is for conventional
  loans and both Freddie and Fannies
  change this frequently

• Government loans with scores about 659
  have no hits on pricing




     Factors in Credit Scoring

 • There are five factors – some have more
              weight than others




         Government Loans
• For the last year or more minimun credit
  score was 640.

  Recently it h changed t 620
• R    tl     has h   d to

• There are a few lenders now who will do
  600 or more




                                             9
             Payment history

•   35% of the score
•   How recent are the late payments
•   How late are the late payments
•   How many late payments are there




       When is a payment late

• A payment is considered late for credit
  purposes when it is 30 days late

• However it is not the date it is received but
  the date the creditor POSTS it




    How much do you owe vs. how
         much can you get

30% of the score
The credit score is affected by how much your
  balances are on equity lines and credit cards – if
  the amount owed is more than 30% of the line
  the score will decrease
Most American's use less than 20% of their debt
One in Seven American’s use over 80%




                                                       10
      How long is the history
• 15% of the score

• How old is the average account

• What is the average age of all accounts




   Result of Closing Out Credit
              Cards
• Recently a client came to me with her
  credit report which the mid score was 776

     Closed out 2 old unused credit cards
   • Cl   d t      ld      d    dit    d

• Her new credit score was 710 – causing a
  one point fee in closing costs




The last time credit was applied for



• 10% of the score

• how long between someone asking for
  more money

• However shopping around does not count




                                              11
   If A Borrower Does Not Use
              Credit


 • Typically after 3 years if a borrower does
     t         dit th          dit       ill be
   not use credit then no credit score will b
                    generated




             New Credit
• Applying for new credit is a big no – no
• Even after the lender has pulled it
• All investors require a report within the last
  60 d        Freddie d Fannie now want a
      days – F ddi and F        i            t
  report within 4 business days of closing
• But if the report needs fixing and the
  borrower has applied for something else it
  will show up




              Type of credit

• The last 10%

• What is the credit mix – is it all credit cards
  or are there some installment debt there
  also




                                                    12
              Score cards
• The credit bureaus use different score
  cards for different types of borrowers

  Someone who h fil d b k t will
• S          h has filed bankruptcy ill
  have one type
• Someone who has very little credit will
  have another and so on
• There are 10 different levels




    Pay a collection account and the
          score goes DOWN


• Well not always but, if a group of collection
          t         id ff th th li t
  accounts are paid off then the client couldld
  be put into a different score card –
  depending on how that card is calculated
  the score can go down
• The Score cards over lap




            Vantage Score
• A new type of score
• A few small variations
• Current scores go from 300 to 850
• Vantage goes from 501-990
• Created jointly by the three major credit
  agencies
• This has not caught on however




                                                  13
   How can they be improved?



• 19 different ways to make it better




  1. Start with the simple things


• Make sure the name is right
• Social security number is correct
• Make sure the credit accounts are
  accurate – Old Bankruptcies are a great
  example of this




          More simple stuff

• Get rid of hard inquires – ones that are not
  authorized – they can be disputed




                                                 14
               Even more
• A bankruptcy older than 10 years that
  does not have a specific BK code (chapter
  7)
           ,j g        , paid tax liens over 7
• Lawsuits, judgments, p
  years
• Paid liens or judgments that are listed as
  unpaid
• Duplicate collections on the report
• Any negative information that is not correct




                Disputing
• Adding a letter or notation to your credit
  report (you are allowed to do this) will not
  raise your score – Fico cannot read letters

• A client can dispute anything on a report –
  but if they wish to have it removed they
  really need to notify all three bureaus




           Disputing errors

• The credit bureau must act within 30 days
  on any disputes the client requests. If it
  can not be proven then it must be dropped
  off of the report
• However if the lender discovers after 30
  days it was valid they can put it back on




                                                 15
   What to do if the credit bureau
         does not budge?
• Get stubborn
• Consult with people who have been there
  before you www.creditboards .com
  Get      tt
• G t an attorney
• Call your Congressman
• Call the newspaper or TV
• But before you do so make sure you are
  right




    Back to the improvements

• Pay the bills on time – lost in the mail – I
  moved – excuses just don’t cut it

• Start using automatic payments

• Pay down balances on credit cards




• Avoid consolidation – the credit score is
  programmed to look for this

• Never close a credit card out – unless the
  fees are too high –

• If there is no credit then apply for a
  secured credit card and a small installment
  loan. You need two different types to build
  the score




                                                 16
• Use a debt reduction planner – a good one is at
  quicken.com

• Use rapid rescore – not all lenders have it but it
          k     ll the     d     id is deceiving
  sure works well – th word rapid i d      i i
  however

• Use a 401k loan to pay down debt

• Get positive information up loaded to all three
  bureaus




              Rapid Rescore
• Best way to improve a clients credit score

• Never costs more than $2,500

• Usually only one score needs to be
  improved




         Rapid Rescore Part 2
• Borrower must do exactly what we tell
  them to do – and there is a small chance it
  will not work

• If we say pay off Home Depot to $208 that
  does not mean pay it all off and close it out

• Also leave the other cards alone




                                                       17
       Rapid Rescore Part 3

             • It is not RAPID

• Depends on the date when the Creditor
       posts to the credit agency

      Can take up to 1 month to fix




         Collection accounts
• They are supposed to come off after 6
  years in Maine.
• However when the seven year cycle is
  getting close they sell it to another
  collection company and up date the report
  and the 6 year cycle starts again
• This is illegal but they do it anyway
• Easily disputed




      Tricks that do not work
• Disputing every thing in sight
• Creating a new identity or use a tax id
  number – now you have no history
  Closing t bl
• Cl i a troublesome account       t
• Importing someone else’s credit (this used
  to work)
• Using the instant credit card fix companies




                                                18
What if there is no credit score?
• FICO expansion score which is done
  manually
• 50 million people do not have a credit
  score
• 4 trade lines are required which must be
  paid monthly for at least twelve months
• Can be utilities, apartment rent, cell phone
  bills, car insurance, cable bills….




                      Myths

• closing an account will improve your score – no
  it won’t - it reduces your total credit availability
  and makes your accounts look younger

  The          is i d
• Th score i raised if you l        the       dit
                              lower th credit cardd
  limits – it reduces the credit availability

• Don’t run my credit it lowers the score – FICO
  counts as one hit for like kind inquires over a two
  week period




            Credit Counseling
• Credit Counseling is worse than
  Bankruptcy – no

  However th credit score really d
• H         the    dit                 d
                              ll depends
  on how the Credit Counseling is reported
  by the individual creditors




                                                         19
• Checking my score lowers my score – only
  if you have your friendly loan officer do it.
  Creditreport.com or other self help
  services does not affect the score

• You have to pay interest to get a good
  score – no fico does not make a distinction
  on balances carried versus paid off in a
  given month




• Checking my score lowers my score – only
  if you have your friendly loan officer do it.
  Creditreport.com or other self help
  services does not affect the score

• You have maintain a balance to get a
  good score – no fico does not make a
  distinction on balances carried versus paid
  off in a given month




• Credit score is simply It is a system based
  on how well debt is used

  Non    f    dit ill      lt in
• N use of credit will result i no scores




                                                  20
                   Errors


• 60% of all reports have at least one error
      them. Not always a b d error or a b d
  on th     N t l        bad            bad
  thing




                Relatives
• If the borrower is a Junior

• Or has the same name as a relative

• Have their credit get checked – there is
  always some over lap




 Charge offs and Bankruptcies
• Creditors routinely do not report when
  someone pays a collection account or
  charge off

• When someone files bankruptcy the
  creditors almost never clear this on the
  credit report as it costs them money to do
  so




                                               21
          Credit Counseling
• Some lenders will continue to report you
  late – even if they have agreed to accept
  lower payments




    Tax Liens and State Liens
• Are the worst – I have one client who has
  tried to get their town tax lien (Topsham)
  removed from their credit report on three
  different loans – it has been paid since
  1992 and it is still on there




             Identity Theft
• Happens more than you think

• Most commonly people looking through
       trash buy   h dd
  your t h – b a shredder

• Never send your social security number by
  internet – unless it is a secure encrypted
  site




                                               22
     Ways to protect yourself

• Life lock – absolutely the most secure but
  the most cumbersome

• Experian – notifies you within days if
  someone has pulled your credit report




                The End



• Thank you for attending
  Bob Staab




          CREDIT REPORTS
                and
            Credit Scores

                            Robert Staab




                                               23

								
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