About Your Credit Report

A "Credit Report " refers to a consumer credit file which is made up of various credit information about you. It is a picture of how you (as an individual) paid back the companies you have borrowed money from, or how you have met other financial obligations. Your credit report is a very important element of your mortgage loan or home equity loan application.

Lenders use your credit report to evaluate your loan application. Currently, there are three credit reporting agencies that maintain credit profiles on everyone in the country. They are TransUnion, Experian, and Equifax. Credit reporting agencies work with creditors on a subscription basis. For an annual fee, a lender has access to the credit reporting agencies databases. This allows a creditor to both get credit information on you and also allows them to post credit status on any loans you have with them. Credit information relating home mortgage payments is particularly important.

There are usually five categories of information on a credit report:

• Identifying Information
• Employment Information
• Credit Information
• Public Record Information
• Inquiries

What is NOT included on your on a credit report:

• Your race
• Your religion
• Your health
• Your driving record
• Your criminal record
• Your political preference
• Your income

The credit report contains detailed credit account information including:

• Bank credit cards (Master Card, Visa, American Express, etc.)
• Retailer credit cards (Sears, Macys, Etc.)
• Student loans
• House loans
• Other types of loans

Additionally, it is common to see the following information on your credit report if you are in default:

• Utility bills (phone, electric, etc.)
• Rent payments
• Medical bills
• IRS Liens
• Property tax bills
• Attorney's bills
• Other suits and judgments against you

Each persons credit report is stored by his or her social security number. When a creditor requests or reports information, the credit reporting agency uses your social security number to work with the correct data. This is why it is not a good idea to give out your social security number unless absolutely necessary. With it, someone else can get your credit report via computer and use that information to commit fraud (and have the undesirable side effect of damaging your credit report and your creditworthiness).

Credit Score Guide

In a nutshell, a credit score is a statistically derived method of assessing the credit risk of a loan applicant. The credit score is a number that rates the likelihood an individual will pay back a loan. The credit score looks at the following items: past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit, number of inquiries.

A+ or "excellent":

Usually signifies no significant (60 days or more) late payments on any type of credit payments in prior 3 years. People with A+ credit scores typically can receive slightly better mortgage rates on certain loan types in both purchase and refinance loans. Jumbo mortgage lenders frequently give a mortgage rate concession to extremely credit-worthy borrowers. In addition, more creative mortgage alternatives such as no downpayment loans (80 20 0), interest only loans (no amortization payments), bridge loans, no doc mortgages, reverse mortgage, stated income loans and exotic adjustable rate mortgages are available. Examples of A+ credit include a middle, or average credit score of 680 or better; in some cases a credit score of 720 is the cutoff for better mortgage rates.

A or "good":

Usually signifies no significant (60 days or more) late payments on a mortgage loan in prior 2 years and only isolated minor lates on credit payments in prior 2 years. People with A credit typically can receive slightly"market" interest rates on all loan types, including FHA loans and VA loans. Creative mortgage alternatives such as no downpayment loans (80 20 0), interest only loans (no amortization payments), no doc mortgages, reverse mortgage, stated income loans and exotic adjustable rate mortgages are possible but at a slightly higher mortgage rate. Examples of A credit include a middle, or average credit score of 620 to 680 or better; in most cases a score of 620 is the cutoff for better rates from major institutional loan buyers such as Fannie Mae and Freddie Mac. Bankruptcies must be cleared and discharged for 4 years to qualify as having "good" credit.

B or "fair":

Usually signifies some significant (60 days or more) late payments on a mortgage loan in prior 2 years and widespread minor lates on credit payments in prior 3 years. People with B credit typically will receive slightly higher rates on all loan types, except government loans(FHA loans and VA loans) which will not relay solely on credit scoring. Typically, lenders require higher down payments, especially if applying for stated income loans, jumbo loans, and low downpayment loans. Many times, subprime mortgages are used in this case. Examples of B credit include a middle, or average credit score of 580 to 619 or worse; in most cases a score of 580 is the cutoff for APPROVAL from major institutional loan buyers such as Fannie mae and Freddie Mac. Bankruptcies must be cleared and discharged for 2 years to qualify as having "FAIR" credit.

C or "poor":

Usually signifies MANY significant (60 days or more) late payments on a mortgage loan in prior 2 years and widespread MAJOR (60-90 DAYS) lates on credit payments in prior 3 years. People with C credit typically will receive higher interest rates and higher required equity or downpayment on all loan types, except government loans(FHA loans and VA loans) which will not relay solely on credit scores. Often times, people with C credit will only qualify for subprime or bad credit loans. Examples of "C" credit include a middle, or average credit score of 520 to 580 or worse; in most cases a score of 520 is the cutoff for APPROVAL from PORTFOLIO loan buyers whose loans are equity driven. Bankruptcies must be discharged at the time of loan application to qualify as having "Poor" credit. Current charge offs, bad debts and judgments sometimes need not be paid off to get a mortgage. The penalty is a reduce pool of lenders, high mortgage rates, and stiff prepayment penalties if you refinance within 3 years.

Credit Report Access

The Fair Credit Reporting Act (FCRA) outlines specifically who can see your credit profile. Businesses must have a "legitimate business need," and a "permissible purpose," as stated in the federal law to obtain your credit profile. Otherwise, only you, and only those who you give written permission, can access your credit files. Your neighbors, friends, co-workers, and even your family members cannot have access to your credit profile unless you authorize it. Any company that receives a copy of your credit profile will be listed under the "Inquiry" section of your report. Some examples of those who can access your credit files are:

• Credit grantors
• Collection agencies
• Insurance companies
• Employers

How to Correct Errors

This system unfortunately has many imperfections. Because there are not enough checks and balances to guarantee the integrity of the data, errors can occur when information about you is reported to the credit bureaus. Fortunately, all of these errors can be easily repaired. However, it can take up to two months (or more) from the time you discover them till the time you can get them removed from your credit history. The best way to protect yourself from these errors or from people committing fraud with your social security number is to get a copy of your credit report from each credit agency once a year and examine them. If they contain incorrect information, take steps immediately to get these items repaired or removed. A clean, positive credit report is a very valuable resource in your financial life. Protect it and keep it clean and it will serve it well when you most need it.

The Fair Credit Reporting Act (FCRA) is the federal law regulating credit reporting companies like Equifax, Experian, and Trans Union. It has been in effect since 1971. A revised FCRA became effective October 1, 1997. This law protects consumers' rights, such as the right to review and contest information in their credit profiles. It also specifically defines who can access the information in a credit profile, and how you are notified of this activity.

You have the right, under the Fair Credit Reporting Act, to dispute the completeness and accuracy of information in your credit file. When a credit reporting agency receives a dispute, it must reinvestigate and record the current status of the disputed items within a "reasonable period of time," unless it believes the dispute is "frivolous or irrelevant." If the credit reporting agency cannot verify a disputed item, it must delete it. If your report contains erroneous information, the credit reporting agency must correct it. If an item is incomplete, the credit reporting agency must complete it.

For example, if your file showed that you were late in making payments on accounts, but failed to show that you were no longer delinquent, the credit reporting agency must show that your payments are now current. Or if your file showed an account that belongs only to another person, the credit reporting agency would have to delete it. Also, at your request, the credit reporting agency must send a notice of correction to any report recipient who has checked your file in the past six months.

For those items in your credit profile which you feel deserve further explanation (such as an account that was paid late due to the loss of job, military call-up, or unexpected medical bills), you may send a brief statement to the appropriate credit reporting agency. The information will be placed on your credit profile and will be disclosed each time your credit profile is accessed.

Should you use one of those companies that promise to help correct my credit? It's your choice. However, beware of companies that promise to remove accurate information from your credit file. Accurate information cannot be removed from a credit file. There is nothing they can do for you that you cannot do for yourself by contacting the credit reporting agencies directly. Only time will heal a delinquent credit history.

Conclusion

Most people will not need to worry about the effects of their credit history during the mortgage process. However, you can be better prepared if you get a copy of your credit report to review before you apply for your mortgage. That way, if there are any errors you can take steps to correct them before you make your application.

If you have had credit problems, be prepared to discuss them honestly with your mortgage lender and come to your application meeting with a written explanation. Responsible mortgage lenders know there can be legitimate reasons for credit problems, such as unemployment, illness or other financial difficulties.

If you had a problem that's been corrected, and your payments have been on time for a year or more, your credit may be considered satisfactory.