Patrick Ritchie is the author of the book The Credit Road Map. He can be reached at firstname.lastname@example.org.
Rx for Consumers' Credit
For a better rate and terms, buyers should take these five steps before they fill out a mortgage application.
January 1, 2009
Bad credit can ruin a deal.
Bad credit translates into financing rejections, prohibitively high loan rates, and failed deals. That's why real estate professionals need to educate themselves about the credit system and show prospective buyers the value of repairing their credit, if necessary, in order to qualify for a mortgage.
Unfortunately for borrowers, most credit reports contain inaccurate information. A June 2004 study performed by the U.S. Public Interest Research Group, a consumer advocacy group, showed that 23 percent of consumers had mistakes on their credit reports serious enough to result in the denial of credit. All told, an amazing 79 percent of consumers had some mistake.
Fortunately, consumers' rights are protected under the Fair Credit Reporting Act. The FCRA gives consumers the ability to correct, update, amend, and take action regarding the contents of a credit report. It also guarantees consumers accuracy, fairness, and privacy in their credit reports.
The Act protects consumers only if they take action, however. Credit bureaus report the information they are given by creditors; they don't verify it. If an error occurs, the burden of discovering and correcting it rests on the consumer. Here's what your customers should do before they apply for a mortgage to make sure their credit reports are accurate:
- Find out what's in their file. Every U.S. consumer is now entitled to one free credit report annually from each of the three credit bureaus: Experian, Equifax, and TransUnion. The easiest (and free) way to get a copy of your report is to go to the government-mandated Web site www.annualcreditreport.com. Also note that if consumers are denied a mortgage or other credit, the lender must tell them whether information in their credit report played a role in the denial.
- Dispute inaccurate information. If your customer determines that something is incorrect on a credit report, the next step is to correct the inaccuracy. If consumers obtained their credit reports at www.annualcreditreport.com, they can dispute errors online. Another option is to write a letter to all three credit bureaus detailing the dispute. (Some states require one agency to notify the other two, but why risk it?) The letter should include documentation such as a cancelled check showing payment, a discharge from bankruptcy, or the like. Remember, banks typically use the middle of the three credit scores when assessing a loan application. If one report showing a high score is correct but the other two are not, the buyers may still be denied credit or forced into less-favorable terms.
- Dispute inaccurate items at the source. Consumers will also want to contact the credit card company or other source of the inaccurate information. For example, if a payment is credited incorrectly, it may be easier to resolve the error by contacting the credit company than a collection agency.
- Excise outdated information. By law, credit bureaus are supposed to remove information pertaining to the credit score — such as a late payment or collection — that is more than seven years old. Neutral information such as employment history does not have to be removed since it does not affect credit scores. Consumers should ensure that the credit bureau removes older information since it can still negatively affect a credit score.
- Protect credit identity. The Fair Credit Reporting Act makes it a federal crime to knowingly and willfully obtain a person's credit report without consent or under false pretenses. If consumers feel that their credit has been compromised, they can request that a credit agency put a "fraud alert" on their account. Consumers can take an even more aggressive step to protect their credit from identity thieves by paying credit bureaus to put a security freeze on their credit. Consumers can temporarily lift the freeze when they apply for a mortgage.
Helping your customers ensure that their credit is intact before they begin the homebuying process will make it easier for them — and you.
Stop the Bleeding
Tips for prospects with truly bad credit:
- Get your spending under control.
- For one or two late payments, ask the lender to re-age the loan.
- Give it time. Even after a foreclosure, a credit score can be repaired within three years. A foreclosure should be removed from the record after seven years and a Chapter 7 bankruptcy after 10 years.