Tag Archive for 'credit score'

If you're experiencing mortgage credit problems, have missed home loan payments, and are perhaps delinquent on other credit accounts as well, it may be tempting to give up. The stress can be debilitating, the balances pile up, and you think you will be in bad-credit Hell forever. A recent study by VantageScore shows that's not necessarily the case.

It's true that missing a mortgage payment does a lot more damage to your credit score than being late on a credit card account. And getting into default can drop your score by as much as another 120 points. But a talk with your lender, preferably as soon as you get into trouble, can help you stop the bleeding. The study found that borrowers whose lenders were willing to capitalize their late payments, that is, bring the mortgage current and roll the arrearages into the loan, improved their credit scores. The mortgage was no longer delinquent and there was no foreclosure.

Others who went into trial mortgage modifications had mixed results. If they were current on their loans at the start of the trial period, the lenders did not report them as late. And if a permanent mortgage modification (which caused the score to initially drop 100+ points to about 600) made it possible for them to begin paying all of their obligations on time, their scores often rebounded to 700 in nine months.

Borrowers who were offered principal reductions in their mortgage modifications also got mixed results, depending on how the loan was reported. If it was left alone, with the same start date and initial balance but the current balance reduced, the credit score tended to increase, because the homeowner still had an aged account with a lower balance. However, if the account was treated like a mortgage refinance with a new start date and balance, the score went down. This effect was even more pronounced if the mortgage was reported as settled for less than the amount due.

Those who let their homes go into foreclosure, negotiated a short sale, or returned the property with a deed-in-lieu of foreclosure all suffered the same amount of credit score damage. And finally, those who filed bankruptcy took the biggest hit of all. However, borrowers with perfect credit saw their scores drop as much as 365 points, while borrowers with credit problems already (score 625) only took a hit of 110 points. The moral of the study? Address your credit problems early, then do what you can to recover. It needn't take that long.

If you're just getting to the point where you feel you understand your credit score, well, prepare to start over. FICO 08 is on its way and is already in use by some lenders. How will this new credit scoring system affect you when you apply for a home loan?

FICO 08 differs from traditional credit scoring in three major ways:

1. Crummy little debts that slip through the cracks won't hurt you - Any collections or public records with an original amount less than $100 will be ignored. Maybe. For a collection to be ignored by the system, it must be reported as a 3rd party collection agency account and not the collection department of a credit card company. If the collection shows up as "tradeline," or late payment, then it will still count against your score even if it is less than $100. This is great for those whose feet have been held to the fire over library fines, pesky tiny balances for medical labwork that show up in the mail, like, a year after you had the work done, parking tickets, whatever. Yay!

2. Credit card utilization WILL hurt you - The ratio of your current balances to your current credit card limits will be a very big booger with FICO 08. Consumers who get close to maxing out their limits will find their scores lower with FICO 08. FICO has apparently concluded that those who over-use credit cards are more likely to default on their debt than they used to be, so this will count more heavily against you than it used to. Couple this change with the credit card companies' recent moves to cut or close the credit lines of less profitable or higher-risk customers and you have a trend toward less available credit and increased penalties for using it. Today, when a one point difference in your credit score, for example 679 versus 680, can cost you thousands in surcharges to Fannie Mae or Freddie Mac, the FICO 08 changes could be expensive for many borrowers.

3. No piggybacking allowed - This new version of FICO is supposed to be able to tell if an authorized user is artificially boosting his / her credit score by piggybacking--that is, paying to be added to the credit card of someone with good credit as an authorized user. Legitimate authorized user accounts, for example a husband and wife, will still count on your credit score. Whether FICO 08 throws out legitimate accounts or inadvertently lets in piggybackers remains to be seen. But if you are relying on piggybacking to elevate your score, you can probably expect it to drop with FICO 08.

The best thing you can do in anticipation of this change is to pay down your credit card debt as much as you can, but keep your accounts open if possible. Make your payments on time. Apply for credit only when needed. And check your credit report at least annually to correct mistakes, head off identity theft, and monitor your progess as you improve your score.

In the last decade, mortgage lenders increasingly relied on credit scoring by the three biggest reporting agencies--Experian, Equifax, and Trans Union--to determine who they would loan to. This policy made underwriting cheaper and faster. And software like Fannie Mae's Desktop Underwriter and Freddie Mac's Loan Prospector pulled these scores from the bureaus, combined them with information about applicants' income and assets, and spat out approvals or declinations in minutes. Underwriting no longer involved extensive research, such as verifying your check-writing history with your bank and your job performance with your boss.

Well, the recent rash of foreclosures has demonstrated to lenders that credit scoring isn't the wonderful, money-saving, predictive process they thought it was. So now many of them are going back to basics, checking not only your credit report but going through court records, verifying your payment history with utilitiy companies and landlords, your property tax assessor, and your insurance companies.

A Time article claims that credit scores have proved poor predictors of performance on loans for that huge bloc of consumers whose scores range from 660 to 720. Mike Mondelli, president of L2C, which uses historical phone payments and other records to assess an individual's creditworthiness, says, "Traditional credit scores do a reasonable job of separating the very bad from the very good, but when it comes to the average person, credit scores are not very effective at figuring out who will pay back a loan and who will struggle."

The bottom line for those planning to qualify for a top-grade mortgage: get your score up to at least 660, but also take care of your other bills on time, don't bounce checks, and try to avoid tickets and other legal boogers. They could cost you big time and for a long time.