Help me help you: Credit Do’s and Don’ts for your clients
While as a Loan Originator you’re not a credit repair professional, yet you’ve still run into the question “What can I do to fix my credit?” from your clients. You’d like to offer them sound advice so they can improve their credit profile and qualify for the best pricing and loan products. What should you be educating them about when it comes to their credit?
The first piece of information your client wants is a copy of their credit report. If your company allows you to securely share the complete report with your clients, do this right away. If not, everyone is entitled to a free report from all three bureaus each year. Have your client obtain their report from www.annualcreditreport.com. According to a study by the Federal Trade Commission, 25% of reports contain errors, and your client should be diligent in correcting them. If they discover something terrible like misidentification or identity theft, it may be time to get a credit professional, attorney, or law enforcement involved. They may end up needing to dispute information on their report as a result. Disputes are a tricky thing when it comes to underwriting, and many lenders are reluctant to approve a file with open disputes. So be sure to let them know to hold off on "disputes" if you are going to proceed soon with a mortgage application.
What does credit scoring use to compute the score?
Five key types of information are used to calculate a consumer’s credit score:
Payment history: 35% of the score's weight
Amounts owed: 30% of the score's weight
Length of credit history: 15% of the score's weight
New credit inquiries: 10% of the score's weight
Type of credit used: 10% of the score's weight
When it comes to credit, there are a few things that can put your clients in a difficult position very quickly. Having late or delinquent accounts after a bankruptcy is a big red flag for an Underwriter that this client is a high-risk borrower. There are other types of debt that can’t be removed through bankruptcy, and they will continue to hinder a credit score indefinitely; delinquent federal student loans, and federal, state, and local tax liens. These often need to be resolved before a mortgage can close. The same goes for child support and spousal support collections. Other types of collections are best left alone, as a partial payment of the debt can cause it to start reporting new derogatory credit information.
In September of 2016, Experian, Equifax, and TransUnion began reporting trended data as required by Fannie Mae. “Trended credit data is historical data on applicant accounts that expands information on several monthly factors over a period of time, including: amount owed (balance), minimum payment due, and actual payment amount made. This data provides a more thorough analysis of an applicant’s credit history and is a powerful predictor of risk.” Utilization is the percentage of credit in use versus credit line available, and this is an important factor in how FICO scores are calculated. Urge your clients to keep their overall utilization under 30%. A little known fact is that 50% utilization is considered “maxed out”. Your clients should consider the value of consolidating their debts, either through their home equity in the case of a mortgage, or via an installment loan. This could help their credit scores, their debt-to-income ratio, their utilization percentage, or all three. Making more than the minimum payments on revolving debts is considered a positive indicator now as well.
It’s important to know where to draw the line with your counseling, and when to defer to a subject-matter expert. Credit repair analysts work with clients directly in order to restore their credit, utilizing a variety of methodologies and an in-depth knowledge of how credit algorithms generate scores. Tax professionals should be consulted for matters involving state and federal tax debts, liens, and levies. In matters of fraud or identity theft, it is often necessary to involve law enforcement to get things resolved properly.