Credit Reports: Why they are important and how to improve them.
Your credit reports are a key factor in determining whether or not you can get a mortgage. There are three different bureaus that collect and report information regarding your overall credit situation. They are Equifax, Experian and Transunion. They all rate you by using a scoring system called F.I.C.O, which stands for Fair Issac Credit Organization. Your F.I.C.O score can range anywhere from 400 to 850 (a higher score is more desirable). Only F.I.C.O employees know exactly how they calculate their scoring system, but recent external pressure has forced them to reveal some of their secrets. I will pass what information I have learned on to you latter in this Blog.
When you are ready to buy a house, you need to shop for a mortgage first. After you have found a lender, they will pull your credit reports. They are looking for three basic things. First, they will look at your F.I.C.O scores from each of the three bureaus (if you are applying for a conventional mortgage). They usually take an average of the three scores or your mid F.I.C.O score. Most conventional mortgages have a F.I.C.O score minimum requirement, if you don’t make it up to that number, you don’t get that particular mortgage. There is generally no room for negotiation on this point. Second, they are looking for any derogatory credit. Derogatory credit are things like late payments, car repos, foreclosures, bankruptcies, tax liens, back child support, bounced checks, collection accounts, etc. Any one of these can be a deal breaker or the lender might accept a letter of explanation as to what caused the derogatory credit to occur. Third, they are looking at all your debt (as reported on your credit reports) and calculating your debt to income ratio. The amount of money you spend on bills vs. the amount of money to take in as income. They have various percentages (based on different loan products) that they deem to be acceptable. If you exceed these ratios, they may be willing to negotiate a little if you are strong in other areas (ie. if you have been at your job for a long time or if your F.I.C.O scores are high).
If you find information on your credit reports that is inaccurate, you can request that it be corrected. You need to send a letter to each credit bureau (that has incorrect information reported) and ask that it be corrected. Write one letter identifying yourself and the information you think needs to be corrected. Make sure you send any evidence you have that supports you request. Photo copy the letter/evidence and sign your original signature to each copy. The bureaus usually have 30 days to investigate your claim. If they can’t verify the information they have reported, they have to delete it from your file. This process also works well if you want something added to your credit. If you have limited credit, send in information that shows you pay your bills on time. For example, if you have a department store charge card and it doesn’t show on your credit reports (ask that it be added to your file).
Here are three other tips that may improve your F.I.C.O scores. One, don’t close open credit card accounts/liens of credit just because you paid off the balance. The fact that you have access to (but are not using) credit/money shows you have some reserves if you need them in a pinch. Two, if you do carry balances on your credit cards/liens, try to pay them down below 50% of your available credit line. There is no set reason as to why this works, it is just one of F.I.C.O’s quirky methodologies. Third, avoid allowing to many companies to pull your credit. In general, each time you have your credit pulled your F.I.C.O score drops. The logic being that a company that pulls your credit MAY extend credit to you and you could run up your debt (before it actually shows on your credit report). The exception to this rule is having companies that are designated mortgage companies pulling your credit. In a 30 day period, mortgage designated companies can pull your credit and your F.I.C.O hit will only be from the first mortgage company.
My name is Greg Hoffman. I have live in Las Vegas since 1990 and I have been a Realtor here since 1999. I also have worked in forward and Reverse Mortgages with major national banks.
About the Author
Tony Sena is broker/owner of Shelter Realty in Las Vegas Nevada. For more than a decade Tony and his partners have provided residential real estate and property management services to sellers, buyers, investors, and property owners in the Las Vegas Valley. A Las Vegas native and former police officer for the City of Henderson, Tony brings to the table a unique local perspective that continues to serve his clients well.