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Credit Rescoring Can Help You Qualify For A Mortgage
Call it the great real estate disconnect of 2010: Mortgage rates have been at half-century lows and home prices have stabilized, but applications for mortgages to buy houses have declined most weeks during the last three months, as measured by the Mortgage Bankers Assn.
What’s going on here? Shouldn’t 30-year fixed-rate loans well below 5% be flying off the shelf? Economists say part of the reason is the expiration of the federal home purchase tax credits, which encouraged thousands of buyers to accelerate their transactions — starting with mortgage applications — into the early spring months to qualify for the April 30 contract deadline.
But other key factors are at work: More stringent underwriting standards imposed by private lenders, declining consumer credit scores in the wake of the recession, and rule changes by Fannie Mae, Freddie Mac and the Federal Housing Administration have all combined to make qualifying for a new mortgage more challenging than it has been in years.
Take credit scores. While most lenders have raised the bar on minimally acceptable scores, Fair Isaac Corp., creator of the widely used FICO score, says there has been a deterioration in millions of Americans’ scores during the last two years. More than 25% of all consumers who have active credit files — roughly 43 million people — now have FICO scores of 599 and below. On Fair Isaac’s scale, which runs from 300 (highest risk) to 850 (lowest risk), a 599 score is considered unacceptable by most lenders.
In fact, since the housing boom went bust, lenders prefer to see minimum scores well into the 700s. Fannie Mae, for instance, gives its best combinations of rates and fees to applicants with 740-or-higher FICO scores.
How can buyers deal with the tougher rules? Tops on the list: Be aware that there are work-arounds and creative solutions to some of the roadblocks. For example, say your credit scores appear too low to qualify for the mortgage you need. Ignore the online and junk-mail “credit repair” come-ons that promise miraculous FICO-score improvements overnight. They are often rip-offs and may not even be legal in some instances.
However, an experienced mortgage broker or retail loan officer can get your credit file into a “rapid rescoring” program that just might get you the legitimate lift you need to qualify. Rapid rescorings performed by independent credit reporting firms — most of them members of the National Credit Reporting Assn. — use procedures approved by the three major credit bureaus to make direct changes to the information contained in credit files.
If there are documented errors in the file, or omissions that are dragging down your scores behind your back, the rescorers connect you, your creditors and the national bureaus — Equifax, Experian and TransUnion — to get the problems fixed. In some cases, rescorers can even spot steps you can take, such as cutting your usage percentage on a particular account, that will boost your score immediately.
Most rescorings take three to five days and cost an average of $30 per “tradeline” or credit account per borrower, says Marty Flynn, president of Credit Communications Inc. in San Ramon, Calif., a credit reporting firm. A typical rescoring costs from $90 to $200. Though extensive rescorings can push FICO scores up dramatically, Flynn said the average increase is more like 25 to 32 points. If you’ve been an irresponsible deadbeat, of course, rescoring your files won’t help much or at all.
Steve Stamets, a loan officer with Union Mortgage Group in Rockville, Md., said rapid rescoring can rack up transaction costs — and even pinch loan officers’ revenue — when an applicant’s scores are being depressed by issues in multiple accounts. One recent applicant had problems with three separate credit tradelines, throwing the entire mortgage application into jeopardy. Straightening them out cost $270.
“We got [the client] above the 620 FICO he needed” to be approved for the mortgages, Stamets said, “but believe me, it took some work.”