Understanding Credit Scoring for Mortgage Professionals
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This document summarizes a webinar about understanding credit scoring. It discusses what a credit score is, why it's important, and the five factors that make up a credit score: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). It addresses commonly asked questions about topics like rate shopping, late payments, collections, closing accounts, applying for new credit, and how long negative information stays on your report. The webinar emphasizes managing credit responsibly over time to improve one's score. It also promotes a credit scoring software product to help lenders increase loan approvals.
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Understanding Credit Scoring for Mortgage Professionals
- 1. UNDERSTANDING CREDIT SCORING Basic credit scoring webinar From Data Facts, Inc. with Blake Higgins and Susan McCullah
- 2. TOPICS What is a credit score Why a credit score is important What makes up a credit score Commonly asked questions True! False! Maybe!
- 3. What is a Credit Score?
- 5. QUESTION!! 5
- 6. 6 5 Factors that Make up a Credit Score
- 9. 9 15% Length of Credit History
- 11. the number of new hires who did well in the interview who Mortgage loan Installment loans Retail accounts Credit cards = Mix of credit (10%)
- 13. QUESTION!! 13
- 14. Rate Shopping Because a mortgage is a major purchase, the bureaus allow a window of time for borrowers to “rate shop” and have their credit pulled multiple times without it affecting their credit score. 14
- 15. The score ignores all mortgage in the prior 30 days and auto inquiries made in the 15 days prior. 15 All those inquiries are counted as just 1 inquiry
- 16. LATE PAYMENTS
- 17. So How Bad Does it Hurt? Experian's National Score Index study showed that the average credit score for U.S. consumers with no late auto payments is nearly 100 points higher than those who have at least one late payment. The national average credit score for consumers with no late auto payments is 703, while the average score for consumers with at least one late payment is 605. www.experian.com 17
- 18. COLLECTIONS
- 19. Dealing with old collections as a means to raise someone’s credit score can actually have a negative impact on a person’s credit score. This is because it will bring the “DLA” current, and the impact of that collection will be felt all over again. Therefore, the proper time to deal with collections is as at closing, if possible. 19
- 21. 21 Negative information on my credit report will eventually fall off…
- 22. Source: www.myfico.com TRUE 7years for Late Payments, Chapter 13 bankruptcy, foreclosures. 7years for most Collections, depending on the age of the debt being collected. 7years for Public records, although unpaid tax liens can remain
- 23. 23 Becoming an authorized user will increase your credit score…
- 24. Source: www.myfico.com MAYBE…. Becoming an authorized user on the account of someone who maintains a low balance and pays their bills on time WILL help to increase your score. However, if the main account holder maxes out their credit card or pays late, being an authorized user can DECREASE your score. Make sure the person has a very low balance and no late payments for the last 7 years before becoming an authorized user on an account.
- 25. 25 It’s best to close as many accounts as possible to get your score higher…
- 26. Source: www.myfico.com FALSE This is because of a person’s "credit utilization ratio“ which looks at a person’s total used credit in relation to the total available credit. The higher this ratio, the more it can negatively affect a person’s credit score. So, by closing an old card, some of the available is wiped out, increasing the credit utilization ratio, which can LOWER the score.
- 27. 27 My credit score will drop if I apply for new credit…
- 28. Source: www.myfico.com MAYBE…… It depends on the inquiry type. Most credit scores are not affected by multiple inquiries from auto, mortgage or student loan lenders. Typically, these are treated as a single inquiry and will have little impact on the credit score. However, if you apply for several credit cards within a short period of time, multiple inquiries will appear on your report. Looking for new credit can equate with higher risk which could drop a score.
- 29. 29 A poor score will follow me Forever…
- 30. Source: www.myfico.com A score is a “snapshot” of your risk at a particular point in time. It changes as new information is added to credit bureau files. Past credit problems impact your score less as time passes. By following today’s tips, a person can eventually increase their scores, and qualify for lower interest rates. FALSE!
- 31. Are You Using 00000000 ?? “Lenders using Credit Xpert as an integral part of their loan origination process are closing 30% more Loans each month!”
- 32. If you close 6 loans per month at $200,000 each 0000000000000 can help you save 2 additional loans that you are losing because of credit scores Over a year’s time, you will close $4.8 million more loans! 32 THIS MEANS…..
- 33. We offer three exciting CreditXpert products Credit Assure: Automatically scans the credit report on the front end for opportunities to raise the consumer’s credit score Credit Essentials: Determines the best actions to take to maximize an applicant’s credit scores, returning specific recommended actions. What-if simulator: Powerfully simulates both pre-defined scenarios and custom scenarios, helping make informed decisions and uncovering new opportunities. 33
- 34. Thank you for Attending! Join us for “Advanced Credit Scoring” on Tuesday, February 9th at 1pm CST 34 Subscribe to our blog: www.datafacts.com Connect on Linkedin: Data Facts, Inc Follow us on Twitter: @dflending Like us on Facebook: “Data Facts Lending Solutions”
Notas del editor
- Looking for a mortgage or an auto loan may cause multiple lenders to request your credit report, even though youre only looking for one loan. To compensate for this, the score ignores all mortgage and auto inquiries made in the 30 days prior to scoring. So if you find a loan within 30 days, the inquiries won't affect your score while you're rate shopping. In addition, the score looks on your credit report for auto or mortgage inquiries older than 30 days. If it finds some, it counts all those inquiries that fall in a typical shopping period as just one inquiry when determining your score. For FICO scores calculated from older versions of the scoring formula, this shopping period is any 14 day span. For FICO scores calculated from the newest versions of the scoring formula, this shopping period is any 45 day span. Each lender chooses which version of the FICO scoring formula it wants the credit reporting agency to use to calculate your FICO score. That being said, I would always go with 14 days as you don’t know which scoring formula your particular lender is using. And if you asked them if they used the classic 98 or the Classic 04, more than likely they wouldn’t know anyway. The third myth, home loan shopping causes numerous inquiries, and therefore lowers your score. FICO has created a 30 day “shopping window” which allows you to search for the best interest rate and terms without being penalized. When shopping for a home loan, if you do all of your rate shopping within a 30 day period these inquiries are counted only as one inquiry.
- What is a credit score? Before, we can even begin to explain what a score is, we need to understand WHY we have credit scores in the first place. Before the 1950’s lenders used to physically look over each applicants credit report and credit history to determine whether or not they were going to extend credit. This process was not only time consuming, but many mistakes resulted as well. As a result, credit scoring formulas were created to help lenders make better judgments, quicker and easier. So, what is a credit score……..(click mouse to see definition)
- Looking for a mortgage or an auto loan may cause multiple lenders to request your credit report, even though youre only looking for one loan. To compensate for this, the score ignores all mortgage and auto inquiries made in the 30 days prior to scoring. So if you find a loan within 30 days, the inquiries won't affect your score while you're rate shopping. In addition, the score looks on your credit report for auto or mortgage inquiries older than 30 days. If it finds some, it counts all those inquiries that fall in a typical shopping period as just one inquiry when determining your score. For FICO scores calculated from older versions of the scoring formula, this shopping period is any 14 day span. For FICO scores calculated from the newest versions of the scoring formula, this shopping period is any 45 day span. Each lender chooses which version of the FICO scoring formula it wants the credit reporting agency to use to calculate your FICO score. That being said, I would always go with 14 days as you don’t know which scoring formula your particular lender is using. And if you asked them if they used the classic 98 or the Classic 04, more than likely they wouldn’t know anyway. The third myth, home loan shopping causes numerous inquiries, and therefore lowers your score. FICO has created a 30 day “shopping window” which allows you to search for the best interest rate and terms without being penalized. When shopping for a home loan, if you do all of your rate shopping within a 30 day period these inquiries are counted only as one inquiry.
- Looking for a mortgage or an auto loan may cause multiple lenders to request your credit report, even though youre only looking for one loan. To compensate for this, the score ignores all mortgage and auto inquiries made in the 30 days prior to scoring. So if you find a loan within 30 days, the inquiries won't affect your score while you're rate shopping. In addition, the score looks on your credit report for auto or mortgage inquiries older than 30 days. If it finds some, it counts all those inquiries that fall in a typical shopping period as just one inquiry when determining your score. For FICO scores calculated from older versions of the scoring formula, this shopping period is any 14 day span. For FICO scores calculated from the newest versions of the scoring formula, this shopping period is any 45 day span. Each lender chooses which version of the FICO scoring formula it wants the credit reporting agency to use to calculate your FICO score. That being said, I would always go with 14 days as you don’t know which scoring formula your particular lender is using. And if you asked them if they used the classic 98 or the Classic 04, more than likely they wouldn’t know anyway.
- As you all know 100 points is a huge margin. The difference in a 640 credit score and a 740 is undeniable. Educate your borrowers helping them understand the importance of these factors.
- Just think of it this way every month that passes after an account goes into collection is creating new histroy and that collection is moving further away from the present. If you have a collection that is 12 months old, that account is not affecting your score nearly as much as it was 11 months ago. When you pay it off, the new DLA is this month bringing yoru score down. This is one of the biggest mistakes people make. They want to buy a house, they try to clean up their credit by paying off some collections, and when they come into their lender their scores are 100 points lower!! Click for effect……
- There are many things you can do that can or may harm your credit scores, but these are 5 of the most common credit mistakes. If you can remember these 5 mistakes, and make sure you don’t make any of these, you will probably have very few credit problems
- Here's the basic breakdown of how long different types of negative information will remain on your credit report: Keep in mind:For all of these negative items, the older they are the less impact they are going to have on your FICO® score. For example, a collection that is 5 years old will hurt much less than a collection that is 5 months old.
- Looking for a mortgage or an auto loan may cause multiple lenders to request your credit report, even though youre only looking for one loan. To compensate for this, the score ignores all mortgage and auto inquiries made in the 30 days prior to scoring. So if you find a loan within 30 days, the inquiries won't affect your score while you're rate shopping. In addition, the score looks on your credit report for auto or mortgage inquiries older than 30 days. If it finds some, it counts all those inquiries that fall in a typical shopping period as just one inquiry when determining your score. For FICO scores calculated from older versions of the scoring formula, this shopping period is any 14 day span. For FICO scores calculated from the newest versions of the scoring formula, this shopping period is any 45 day span. Each lender chooses which version of the FICO scoring formula it wants the credit reporting agency to use to calculate your FICO score. That being said, I would always go with 14 days as you don’t know which scoring formula your particular lender is using. And if you asked them if they used the classic 98 or the Classic 04, more than likely they wouldn’t know anyway. The third myth, home loan shopping causes numerous inquiries, and therefore lowers your score. FICO has created a 30 day “shopping window” which allows you to search for the best interest rate and terms without being penalized. When shopping for a home loan, if you do all of your rate shopping within a 30 day period these inquiries are counted only as one inquiry.