Expert Mortgage Credit Tips for Potential Homebuyers

Are you looking to buy a home? Providers of mortgage loans look into the information contained in your credit reports instead of just looking at the number like a credit card provider.  Tri-Merge credit reports are required for mortgage loans.  The Tri-Merge report is just what it sounds like.  It consists of data from all 3 of the major credit reporting agencies merged into one report.  Because there is more money at stake in a mortgage loan there is more scrutiny of your entire financial picture.  With 3 credit scores provided the lender will go for the middle score.  If spouses or domestic partners apply for a joint loan the lender will use the middle score from the set of scores of the lower scoring applicant.  If a couple has a large discrepancy in their credit scores it may be wise to consider letting the partner with the higher score get the mortgage alone.  The other partner can be added later.  Underwriting rules for mortgages frequently require the use of older versions of FICO scoring.  Federal law requires mortgage lenders to inform applicants of the score they use.

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When you see a tri-merge report printed out you are not looking at your actual credit reports.  The information on your credit reports has passed through a specialized system that modifies it according to the lender’s requirements.  For example, the hard inquiries may be limited to 3-6 months with no reference to soft inquiries.  The lender submits a form with the names of the 3 major credit reporting agencies filled into a field called “Repositories requested”.  I have in front of me a report provided by a company called “Avantus” from West Haven Connecticut, one of the larger providers of tri-merge services.  The lender receives a report containing 8 sections:

1. Applicant personal information (bare bones of name, current address and social security number
2. Repository Files (credit reporting agencies, score, date pulled)
3. File Summary (Account types, number of accounts, open accounts, accounts currently past due, amount past due, payment, balance, historical late payments)
4. Credit Score Information (Name, Repository, Model developed by FICO, Range, Calculation date.
5. Credit History (Summary of number of accounts, number of open accounts, number of delinquent accounts, credit limit, high credit, payment, balance)
6. Underwriting Alerts (Mortgage late, Collection Accounts, Disputed accounts)
7. Fraud Messages (Is address verifiable?  Anything that may be a potential cause of concern
8. Credit Summary (Mortgage, Installment, Revolving, Number of Accounts, currently past due, payment, balance, historical late payments)

These 8 sections are then reported into a “File Summary”.  The file summary has a subsection providing 7 more categories of information:

• Number of Public Records
• Number of Collections/Charge-Offs
• Bankruptcy (Yes or No)
• Available credit
• Revolving/Credit Line used
• Number of Inquiries
• Number of authorized user accounts

The number of inquiries section contains soft as well as hard inquiries.  There is no need to panic if the number is large.  The authorized user account reference provides an alert to the lender if there is a need to look for artificial score inflation through piggybacking on other accounts with favorable characteristics.

The applicant’s financial history is mercilessly laid bare.  If the applicant has not been active about regularly checking their credit score for errors there may be unpleasant surprises which will take time to correct.  If you have been diligent about monitoring your credit reports and know how the system works you have nothing to fear.  There is always something new to learn.  A single extra point can bump you into a new lower interest category or even save a deal that may otherwise have been lost.  To go a little deeper let’s look at the 3 horizontal columns in the section called “Credit Score Information” containing 3 credit scores.  The credit scores in this example are quite low for a real estate loan.  The particular report I am looking at is for a VA loan.  This category receives extraordinary leniency which is much deserved for those who have honorably served their country.

• TransUnion’s score is 618.  It uses factors 038,013,018,008 in computing its “FICO Risk Score, Classic (04)”.  This FICO score has a range of 309-839
• Experian’s score is 624.  It uses Factors 038,13,18,21 in computing its “Fair Isaac (v2)” score.  This FICO score has a range of 320-844.
• Equifax’s score is 596.  It uses factors 038,13,18,34 in computing its “Beacon 5.0″ score.  This FICO score has a range of 334-818.

Don’t be discouraged by the complexity of these reports.  Stick to the basics of paying on time and keep low balances while regularly monitoring credit files at a free service such as Credit Karma.  You need to leave yourself time to correct problems before you apply for a mortgage.  Another thing to watch out for is alternative data provided to lenders willing to pay extra for it by companies like CHEX, LexisNexis, Core Logic and others.  These alternative reports provide information on things that the big 3 credit reporting agencies ignore such as bank irregularities, abandoned gym memberships, payday, and auto title loans as well as other negative information that supplements or complements your file.  If you are refused a mortgage or offered lesser terms than your credit score justifies you can require the lender to produce the source of all negative information that the decision was based on.

Your lender can ask for a “rapid rescoring” if you have a debt on your credit report that needs to be settled at the last minute.  This feature allows the lender to settle problem reports and immediately adjust your credit score without waiting for normal turnaround time.

Judgments and liens are no longer reported by the 3 major credit reporting agencies.  LexisNexis can find and report them if the lender pays for their service.  Open disputes with the credit reporting agencies must be resolved before the mortgage will be processed.