Inquiries on your credit report – What is the real story?

Minneapolis, MN:  As a Mortgage Loan Officer, I’ve pulled and reviewed a lot of credit reports in my day.  I’ve also spent an incredible amount of time debunking the irrational fear so many people have about inquiries on your credit report.

This one sentence is all most people need to know.

STOP worrying about it.

For the vast majority of the people, the vast majority of the time, you should never ever give a second thought to an inquiry on your credit report. It just isn’t what people think.

Credit score factors

So What Is A Credit Inquiry?

Whenever you apply for credit, a credit report is reviewed, and a notation that a creditor reviewed your credit file is added to your report. This is known as a hard inquiry.

A soft inquiry has no effect on anything, and is when creditor review your credit so they can offer things like pre-approved credit cards, or when you review your own credit report.

Where all the fear comes from, is that it is true that inquiries may have the potential to impact your credit score.  MAY HAVE and POTENTIAL and important words.

Do Inquiries Hurt My Credit Score

Maybe, but doubtful in any measurable manor most of the time.

Everyone needs to have credit reviewed. Doing so really doesn’t mean anything to your credit score. It is only when you have a large number of inquiries in a very short period of time that might have a small impact.

Credit scoring models see it as a sign of higher risk when someone applies for a lot of credit in a relatively short window of time. Statistics show a lot of inquiries may show that someone is having financial difficulties.

The scoring models also understand sometimes people have multiple inquiries simply because they are shopping for a loan. This is especially true for car loans and home mortgage loans.

For example, all mortgage loan inquiries in a 30-day window only count as one.

Inquiry Effect Different People Differently

Someone with a 820 credit score and maybe five inquiries in the past 90-days might only see a 5 point temporary drop, but someone with a 641 score to begin with might see a larger drop.

If you temporarily drop from 820 to 810… who cares, you have awesome credit! On the other hand, if you dropped from 641 to 631, this may result in a loan denial, as you were already on really shaky ground, and now went below a minimum score requirement.

Then, as the inquiries age past generally 120 days, the effect on your score goes away. IT’S ONLY TEMPORARY!

Credit Inquiries – The Bottom Line

If you need to apply for credit, apply for credit, and don’t worry about it. On the other hand, probably not a wise idea to accept every Department Store at the malls offer for a credit card at the register when Christmas shopping if you will be looking for make a large purchase in the next few months.

If you think you will be applying for a large loan, like a car or mortgage loan, try to limit the number of hard inquiries in the proceeding 90-days.

Yes, a lot of inquiries in the past 90-days may have a very minor 10 point or so effect temporarily on your credit score, but one 30-day late payment,  and max’d out credit card balances will kill your score.

Relax… Be smart, and for 99% of people 99% of the time – don’t worry about inquiries.


Credit scores and mortgage loan approval

Minneapolis / St Paul, MN:  When buying a home, your credit matters. Credit scores and mortgage loan approval go hand in hand, and are one of the most important factors in the loan approval decision.  With places like Credit Karma, and getting your credit score with your credit card statement, most people have a pretty good idea of where they scores average.  But how does that score correlate to mortgage loan approvals, and what credit score do you need for loan approval?

What Credit Scores Mean In Mortgage Approval

Understandably, the better your credit score, the more likely you’ll get approved for a loan, and the more options you’ll have. Also understand that credit score alone does not get you approved like it does in car loans. Mortgage loans still look at many other things, including debt-to-income rations, job stability, size of down payment, past bankruptcies and foreclosures, etc.

Credit score factors

Standard Conventional Loan Scores

  • 740 score and higher = Access to all program options, and the best rates in the market
  • 720 – 739 score = Access to all program options, and maybe a slight increased rate (.125%)
  • 700 – 719 score = Access to most program options, and maybe a slight increased rate (.25%)
  • 680 – 699 score = Some higher risk program options disappear, and a slight increased rate (.375%)
  • 640 – 680 score = All higher risk options go away, and a bigger increase to interest rate (.50%)
  • 620 – 639 score = Very few lenders offer loans in this range
  • 619 or less = Denied

FHA and VA Loan Scores

  • 640 and above = Generally approved, and the best rates available
  • 620 – 639 = Lots of lenders don’t offer below a 620 score, and interest rate slightly higher
  • 580 – 619 = Huge amount of lenders no longer offer FHA or VA loans at this score level, and rates .50% higher
  • 500 – 579 = Very limited number of lenders offer these loans. Very hard to get approved. Minimum down payment jumps to 10% for FHA loans.  Rate easily .50% higher or more.

Other factors also come into play, for example, most down payment assistance programs are not available with credit scores below 640.

Clearly credit is important in the mortgage loan approval process. Always best do work on improving credit before applying for a home loan.

Ready to apply?  For home mortgage loans in MN, WI, and SD, just click here to get started.


Is Credit Karma your real credit score?

Many people get their credit score from places like Credit Karma, and off their credit card statements. But are these your real credit scores?

The answer is YES and NO. Yes, they are a real credit score, but you may get a very different score when your credit is reviewed by lenders.

The confusing comes because there are many DIFFERENT scoring models out there, including multiple different ones from the same credit bureau. Each company and scoring model calculates your score a bit differently, but they all use information from your report.

The three main credit bureaus – Equifax, Experian and TransUnion – create your credit reports, with credit scoring models like VantageScore, Beacon Score, and various FICO scores. These are use to come up with a score that typically ranges from 300-850. Theses scores for you based on their own proprietary models.

VantageScore 3.0 is a credit scoring model generally used whenever you the consumer are able to look at your own credit score, while most lenders actually use different scoring models.

Basically the thing to understand is something known as Industry-Specific Credit Scoring models, which are tailored to each industry. If you buying a new car, or new home – it may make sense for that lender to consult a credit scoring model created with for what they care most about. So car lenders care about how you handle car loans, credit card companies care how you handle credit cards, and finally, mortgage lenders car most about how you handle mortgage loans. When you look at the Vantage score, I generally call that the generic score because it is not tied to any specific industry.

For example, FICO® has all of these different models: FICO® Score 9, FICO® Auto Score 9, FICO® Bankcard Score 9, FICO CLASSIC V5, FICO CLASSIC (04),  Fair ISAAC (VER. 2).

So your score WILL VARY based on where you get it, and what type of company pulls it. It is most common for us to see your mortgage score easily 20 points lower than your Vantage score.

Your credit scores are typically based on things like how often you make payments on time and how many accounts you have in good standing.

Your score will never factor in personal information like your race, gender, religion, marital status or national origin.


What is the Lender Criteria for Approving Home Mortgage Loans?

What is the Lender Criteria for Approving Home Mortgage Loans?

 Buying a home is a dream for most Americans.  The process is time consuming, paperwork intensive, and can seem overwhelming to many people. The reality is that the process, like anything other unknown in your life, really isn’t as bad as the hype.
Essentially the mortgage lender is going to check you out, evaluate your risk, and decide if they they are going to give you the loan.  It is important to understand how credit institutions evaluate home loan applications and what is required to ensure easy loan approval.

Loan Documentation

The first thing the lender needs is your basic application.  images98725You can provide that in person, over the phone, or with a secure online mortgage application.  Next will be a review of your basic documentation to verify and back up what you supplied on your application.  If you said you make $60,000 a year, great,  prove it with the last 30-days of pay stubs, the last two-years W2’s, and your federal Tax Returns.  If you said you have $20,000 in the bank for down payment, great.  Prove it by supplying your last two months bank statements.

Pretty straight-forward so far.  But each person is different, so you may need other documentation.  Recently divorced?  Provide your divorce decree.  Receiving alimony, child support, social security, pensions, disability, or other sources of income.  No problem, but again, prove it with the appropriate supporting documentation.  Have an old bankruptcy?  We’ll need a full copy of your bankruptcy papers, including the discharge notice.  Have an old foreclosure or short sale?  We’ll need the paperwork to verify the date.

Once all this is established, we can determine loan eligibility.

Income to Debt Ratio’s

Debt-to-income ratio’s, or DTI, is simply a calculation of how much money do you make, and how much would the new home itself cost as a percentage of your income. We also look at any other existing debt, then determine what the new house and existing debt would equal as a percentage of income.  If these numbers are too high, you’ll be denied because you are stretching yourself too thin.

DTI is one of the major deciding factors for your loan application. To understand how a loan application gets reviewed, here is a sample:.

Two individuals, Bob and Mary apply for home loan of $200,000.  Bob makes $40,000 a year salary, and Mary makes $30/yr, full time. This equals about $60,000 a year. So adding those two, their combined qualifying income is $100,000 yr, or $8333 a month before taxes.

Bob has a car loan of $300 a month, and one credit car, with a minimum monthly payment of $50 a month.  Mary also has a car payment of $275 a month, a $50 a month student loan, and credit card with minimum payment of $75.  All this debt equals $750 a month.  For most loans, mortgage lenders do NOT look at utilities, car insurance, day care, etc.  Just the items that show on your credit report.
The house they want to buy is $300,000.  They plan on putting a large down payment of 20% ($60,000).  Factoring in paying back $240,000 at 3.50% interest, homeowners insurance of $1320 a year, and property taxes of $3600 a year.  Their monthly payment would be $1497.
The house payment works out to be 17.9% of their monthly income (housing ratio), and with there $750 in other debt, their total debt ratio is $27%. Both of these numbers are below maximum debt-to-income ratio’s, so Bob and Mary are in good shape.  They are buying a home they can safely afford.
Credit Report and Score
The credit score works as a first impression for the lender, the higher the score, the better is your chance of the loan being  approved.  Credit scores are not perfect, but generally are a pretty good indicator of your risk.
fico_graph
Poor credit scores, essentially anything below 640, and you should probably not bother applying, and work on improving credit first.

Down payment and Cash to Close

Buying a home is going to require money.  Even no down payment loans require some money, especially once you start factoring in closing costs.  Mortgage lenders care greatly about you proving the money needed to buy the house.  We will look at your last two months bank statements.  Did you have the money, did you transfer it from a different account, is it a gift?  If you show large non-payroll deposits, expect to be asked, and to prove where the money came from.
The reasoning behind this goes to many items, from fraud, to undisclosed debt.  Is that large deposit a gift, or really a loan that you’ll need to make payments on, for example.

The Bottom Line

To sum up, while a high credit score, strong credit history, big down payment, and good income will help in loan approval, they, by no means, guarantee one. Having manageable debt levels also plays an important role. Lenders make money by lending money. We want to give you a home loan. On the other hand, the whole purpose of underwriting is to minimize risk. A home buyer unable to safely afford the home is not good for them or the lender.


Why free credit report scores are not accurate

Why free credit report scores are not accurate

Minneapolis, MN:  As a mortgage loan officer, every single day, someone tells me their credit score they received from Credit Karma, some “free credit report” web site, their Discover Card statement, or even directly from the actual credit reporting agency.

Everyday, I tell them that is NOT their correct mortgage credit score.

We jokingly call those score your “Fake ‘O’ Score”  – (joke for FICO score)

Why isn’t my credit score my credit score?

It is actually rather simple. There are multiple credit score models, and the models vary by what you are doing.

Your Credit Score

When you apply for a credit card, the credit card company cares most about how you handle credit cards, and the likelihood of you defaulting on a credit card. Like wise, when you apply for a car loan, the scores are based on the likelihood of you defaulting on an auto loan. The same holds true for mortgages loans.

When you obtain your credit score from ANY SITE that YOU as the consumer are able to get your credit report, you are getting a GENERIC score.  That is, a score NOT based on any one industry risk factor.

It is very common for mortgage lenders to pull scores that are 20 points, even 30-points lower that you just saw on one of those other sites…. and NO, it isn’t because we pulled your credit!!  That truth about inquiries NOT lowering your score is for another article

 


Stop worring about inquiries on your credit report

Inquiries on your credit report

Plan on getting a home loan soon? Worried about qualifying for a mortgage? Need to get pre-approved to buy a home in Minnesota or Wisconsin? Think your credit score will go down?

For 99% of the people, 99% of the time, you don’t need to sweat a lender pulling your credit report!


Minneapolis Weak and bad credit loans down since 2007

Minneapolis, MN:  Not much of a shocker here, but weak, and bad credit loans are down dramatically since the lending correction of 2007.   Part of the reason for the housing collapse was an immense community desire to allow everyone to have a home. Clearly, that experiment failed miserably. Simply put,  not everyone who wants a home loan deserves a loan, regardless of what liberal community activists say.

Mortgage loans written today, have some of the highest “quality” seen in underwriting history. New mortgage regulations pretend to provide important protections to borrowers, but have also lead to a permanent increase in the cost of originating loans to all borrowers, and a dramatic decrease in loans to those with poor credit.

deniedBetween 2007 and 2012

  • Home buyers with credit scores higher than 780 declined by 30 percent
  • Home buyers with credit scores between 620 and 680 declined by 90 percent
  • Home buyer with credit scores below 620 were virtually non-existent

Loans harder to get with no incentive

 

All loans are much more difficult to originate, process, and underwrite.  But small loan amounts, and especially small loan amounts combined with credit challenges require a huge amount of time and effort that loan officers can no longer be compensated correctly to work on.

In the past the loan officer and their company were rewarded and compensated for their extra efforts with problem clients. Today, loan officer walk away from them because there simply is no reward or incentive to help challenging clients.

Simply put, if you worked on a project for 10-hours, and got paid the exact same amount as you do on a 1-hour project, would anyone ever work on the 10-hour projects anymore?  Of course not… The government and community activists may disagree, but Loan Officers and lenders are in this business to make a living, not work for free.


Does paying old collections fix my credit?

Minneapolis, MN:  Sometimes life happens.  Good people end up with bad credit. But for most, bad credit is fixable with a little time, effort, and knowledge.  Credit decisions for just about anything, car loans, credit cards, home mortgage loans all depend on your credit score. We all know having a higher score means not only getting the credit, but at lower interest rates.

deniedThe biggest item people need to understand is that a huge portion of their credit score is based recent information versus old information.  A 30-day late payment on a car loan from 5-years ago DOES show up on your credit report, but it has little impact compared to a 30-day late payment from last month.

Paying off old collections:

There really isn’t much you can do about late payments on your credit report, so an area that many people attempt to correct is any old unpaid collection accounts.  In theory, paying off old collection accounts seems like a good way to improve your credit score. but mistakes that lower your score, especially  temporarily are most often made here when attempting to improve your credit score.

Date of Last Activity:

Assume you have a 5-year old collection account. It is just two-years from falling off your credit report, and while collections are bad, because of its age, it is only having a small impact on your overall score.  By paying it today, you move the date of last activity to a current date.  Your credit report now “sees” this payment activity as current.  You now have a “current” paid collection, versus an old unpaid collection. While moving a collection from unpaid to paid will help in the long run, it may hurt your score today.

Assume one the other hand you have a one-year old collection account. This is having a major effect on your credit score, and should be taken care of immediately.

Because of how the date of last activity algorithm works, when attempting to improve your credit score, always deal with the most recent negative accounts first.

In the long run, paying off old collection accounts is ALWAYS the best thing to do – but be aware that  if you are looking to improve score for a purchase in the short-term, paying off old collection just might end up lowering your score before you see the long-term improvements you desire.

 


What does YOUR credit score say about you?

What does your credit score say about you?

Everyday I am looking at credit reports, and making credit decisions. It amazes me sometimes the people who call and say they have good credit, when they don’t. It also amazes me the people who have good credit, and fear they can’t get a loan.

So What’s Your FICO Credit Score?
Every lending facility uses basic guidelines to determine your credit worthiness, including your FICO credit score. Upon reviewing your mortgage application, you’re given a credit grade and credit scoreand a determination regarding your home mortgage loan approval or denial.

There are no hard-and-fast rules for determining your specific credit score grade.  Each lender’s criteria may vary slightly, but generally speaking, if you have a mix of credit type (mortgage, revolving, car loans), you have had it for awhile, and you make your payments on time. You have nothing to worry about.

800 + Credit Score: AAA+ A credit score of 800 plus is basically flawless credit. This is usually obtained only with a long history of unblemished credit. You will get the best of the best anything credit related, from mortgage loans to car insurance. Scores in this bracket represent about 13% of the population.

740-799 Credit Score:  AA+ A credit score of 740-799 is considered great credit, and will typically result in the best interest rates and approval rates for anything credit related. You have nothing to worry about if you scores fall in this category. In fact, roughly 27% of the population has a credit score of 750-799 alone.

700-739 Credit Score: A+ A score in this bracket is considered good credit. Although it’s not perfect, you should still be able to qualify for most home mortgage loans and auto or rental leases. You may be offered a slightly higher interest rate than offered to borrowers with excellent credit for mortgage loans, credit cards, car insurance, and homeowners insurance.

680-699 Credit Score: B+ Credit scores from 680 – 699 are considered average. You should never have any problems getting basic financing, but you are now in the area where you may pay a slightly higher rate, be required to have a bigger down payment, or be offered less favorable terms. There will be situations where a credit score in this range may prevent you from getting certain types of financing, such as an zero down mortgage loan, the lowest auto insurance premium, or a zero down car loan.

620-679 Credit Score: C Credit scores from 620-679 are still considered “good” or “ok” by many creditors, though you may see further restrictions and fewer approvals when attempting to get a car loans, credit cards, or a mortgage. For example, you can still get an FHA mortgage with this score, but a lot of conventional loan lenders would deny you with a score below 660. Large numbers of people have score in this range.  It would be very wise to evaluate why your score is in this range and try to improve it. In this range, you are NOT getting the best deals in the market.

580-619 Credit Score: D Credit scores in this range are bad, and clearly below average. If you are on the lower end of this range and someone asks, you can answer “I have bad credit“. You will have a difficult time securing a loan, or applying for a credit card. If you are able to secure financing, you’ll find higher interest rates for your low credit scores. If your credit score falls in this range, you definitely need to take a hard look at your credit report and take measures to raise your credit score. Many consumers with credit scores in this bracket are considered “subprime” and may have to work with bad credit banks and lenders to secure financing. You’re basically throwing money away at this point because of your poor credit.

500-579 Credit Score: F

No discussions, no glossing over it. Credit scores in this range are just flat out bad. If you’ve got a credit score in this range, there’s a good chance you have a major derogatory items on your credit report  such as as major late payments, court judgements, collections, foreclosure, or a bankruptcy. There is no question that your credit score is in need of serious credit repair. You will almost always be denied for credit with this score range, or pay such a premium for the credit, it usually is not worth it. You’re clearly paying higher interest rates and making credit mistakes that will impact your life for years to come.

Below 500 Credit Score

Credit scores below 500 are very bad. You almost have to get up everyday and ask yourself “how can I further wreck my credit today” to be in this category. You will usually have current, or very recent major issues, such as a bankruptcy or foreclosure. Improving credit from this level will usually take years to repair (but it can be done). Credit will universally be denied, and you will be paying a major premium on things like car insurance.