Saturday, July 19, 2008

Stop Your FICO From Becoming a Fido!

Online Mortgage Shopping Impacts FICO Scores
If you've considered checking out an online mortgage site: think again. What they don't tell you is that their network may comprise multiple agents. Each may pull your credit report (separately) over a course of hours or days while they review your loan options.

While all this is going on, your FICO score is taking a nosedive. Each mortgage inquiry can negatively impact your score 3 points. Each time. So if 10 brokers pull your credit in one 90 day period you could be 30 points worse off. And here's the scary part: each of those 10 brokers could actually submit your application to another 10 banks who also check your credit and that little exercise just cost you 30 points per broker...so the potential for damage is exponential. Because banks and lenders have strict FICO score requirements, a lower FICO Score can affect your qualifying for the loan you want. So much for convenience...

What is a FICO Score?
Invented by the Fair Isaac Company, FICO scores are based on a scale of 300-850, there are three FICO scores issued to you--one from each of our three National Credit Bureaus: Experian, Transunion and Equifax. These are our government respositories of information collected from creditors, courts and municipalities across the country. Not all creditors report to all three bureaus, so your score numbers will vary somewhat. They also collect information reported by collection agencies, government sources and other brokers who submit information about you to verify your identity when you apply for a mortgage.

FICO scores are one measure that lenders use to evaluate you, by placing you in risk brackets. These brackets (a range of score numbers) supposedly determine your likelihood of defaulting on loans. Every time you apply for credit, be it a cell phone account or credit card, you can bet your credit is being pulled.

Your Credit Report is not the same thing as your FICO Score.
The report is prepared by a Credit Reporting Agency that 'pulls' the information on file from the three National Credit Bureaus. Different lenders may prefer the score from a particular bureau, but most use the 'middle score' of the three scores. FICO scores are based on complicated logarithms which indicate how well you manage your debt.

What's a 'Good Score"?
The difference depends upon the lender and their own guidelines, but basically 680-740 is required for the best rates for conventioanal loans. The difference in a 679 and a 680 score (the higher the better) could make quite a difference in the final analysis. Your score also determines whether you qualify for a 'no doc', 'stated', or 'full doc' loan. The higher your score, the greater the trust lenders have in the information you provide. The lower your score, the more verification (paperwork) lenders require. Anything over 740 is gold standard. Lenders have restrictions on funding mortgages below certain scores but some capitalize on this niche by charging higher rates.

In late 2007, Fannie Mae and Freddie Mac progressively raised the 'guidelines' they allowed for credit scores and debt to income ratios. We now have penalty-based interest rate pricing for lower scores. These days if you are self employed you can expect a very hard time if your FICO score is below 700. A FICO score of 580 is the lowest most banks will entertain for government guaranteed programs like FHA, VA, and USRDA Loans. Every bank and lender must adhere to these guidelines unless they hold their own loans in a portfolio (very few do) rather than sell them.

A FIDO Story
A client of mine requested a 'free' online Credit Report she saw advertised on an internet ad. She clicked on the site, and answered a few very personal questions including giving out her Social Security Number, email address, etc. and was asked for a credit card number to 'verify' her identity. Moments later, her screen flashed blank and she could not retrieve the report. Annoyed, she cancelled the transaction, without receiving a report. She checked her emails: no report. A few weeks later, she noticed a charge on her account for a yearly service fee which she did not recognize. Unfortunately she had used a Debit card so her bank would not refund the payment because she had 'authorized' it by giving them her card number.

While many of these so called credit firms are being shut down, it's best to avoid the heartache. Unfortunately, this same client had submitted an online mortgage application to a firm promising three competitive bank quotes. Her FICO score fell about 60 points in one month. In her case, the original broker she contacted did not mention they used several agents and after a few weeks, they simply turned her down after wrecking her score. I was sickened when I saw her report afterward. Her list of lender inquiries was as long as your arm, which also affects your score.

Unfortunately, contesting an inquiry on your credit is not really possible...you can bark all you like!

Regular Check Ups
By now you've probably been drilled about checking your credit yearly. Fortunately, every citizen can a get free report once a year in the USA. It's wise to sit down and look it over carefully to verify that no unauthorized credit cards or collections have been lodged against you. If you happen to have a common name, it is easy for mistakes to occur. I knew a man who had the same name as an uncle who lived rather irresponsibly. He was actually advised after repeated efforts clearing inaccurate reports against him to change his name!

Not all Credit Reports show your FICO score, so you can order your own online from the Fair Isaac consumer site www.myfico.com It costs about $49 for a Tri-Merge (all 3 scores). It does not impact your score when you check it yourself. When you apply for a mortgage, your bank or broker will pull a professional Tri Merge Report. Ours costs about $20 if you want to use the secure link below. We will call you to discuss your report with no obligation. Banks can't use the consumer reports from My FICO as they are apparently sanitized.

Banks and Brokers must have your permission to pull your credit but this practice may not be adequately monotored in some settings. If you already have a banking or credit relationship (cards, revolving accounts) your creditor may check your credit without your permission to see how you are perfomring on your other obligations. This is the really stinky part: if you are behind or missing payments on accounts, your current creditors can raise the rates they charge you!!

Legally, when a bank or lender pulls your report we are required to give you a copy of the report and a form listing any derogatory information used if we turn down you application for a loan. A mortgage lender should be able to explain your report and take the time to go over it with you. Your Credit Report is your first step to getting the desired result: the loan you deserve!

Wishing you every credit sanity! Loannetter

© copyright 2008 susan templeton loannetter