Home inspection findings by Frank Schulte-Ladbeck, Professional Real Estate Inspector TREC# 9073

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Your Credit Score

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Your credit score according to FICO. Tips from an inspector on how to improve your financial circumstances.

With the subprime mortgage crisis of 2007 causing problems for people looking to buy a home, I decided to take a closer look at obtaining a loan for a home. I decided to pretend that I was going to buy a home, and that I probably have bad credit. I thought by making this assumption that I might discover some bits of advice for home buyers when dealing with their credit, their credit report, and FICO score.

Like most of my searches, I started off at the library. I took out several books dealing with financial matters, but I focused on volumes which had an emphasis on repairing credit or dealing with bad credit. You will discover that your library has a good deal of information on this topic, but I found that after reading a few books that some information is no longer current. I came to several dead ends, so I am going to write about the path which gave me some results. I will not deal with what you should do if you have a real credit problem. My goal is to help you find the best deal on your mortgage. The books in the library can help you in dealing with your credit debt.

Understanding FICO Scores

What I discovered is that lenders place a good deal of importance on FICO scores, but that these scores are not what I thought they were. Fair Isaac Company (FICO) produces the method for this scoring system, but here is the catch: there are different FICO scores for different situations and different companies. One FICO score is specifically for mortgages while another is for auto loans. There are other FICOs for other loans or insurance. On top of this, each company may use a slightly different mean for calculating this score. The score is actually a comparison of your financial history to other people. It predicts your behavior by stating that someone with your history will statistically behave like these other people. Scores generally range from 350 to 850. Below 500, a person is considered to be a great risk. Between 500 and 700, a person is considered to be an average risk. Above 700, a person is considered to be of little risk. I am making broad statements here because each score number actually predicts an exact risk. The higher number provides you with lower interest rates for loans, and you can obtain a better price on insurance. Your FICO score is also constantly changing. The score may not have large hundred point jumps, but twenty points may conceivably occur from month to month, and this can result in differences in your loan rates or insurance rates.

Improving Your Credit Report

All of the books that I found made reference to three Cs or five Cs for explaining your score and how to improve this credit score. Generally these Cs were broad terms like character and capacity. Here is what improving your score boils down to though:

1.Pay your bills on time- various credit institutions have a variety of means for causing you to mess up on this part. They want you to pay your bill late, so they can charge late fees, and then increase the interest you are paying for this credit loan. If your due date is a Sunday, pay by the Friday before that date. One credit card company has a due date, but the fine print says that payments take five days to process, so the actual due date is five days before the stated due date. Check every detail, so your payments are credited before being considered late.

2.Have your debt to credit line and your debt to income ratios low. Here is how you calculate these numbers: add up all of the amounts you owe on your credit cards. This is your total debt. The credit card statements will have a figure for your total line of credit (how much you can spend on that card). Add all of those numbers up to obtain your total credit line. If you receive the same pay each week, take the amount you earn before paying taxes, and then multiply this number by fifty-two to get your yearly income. If your pay is different each week, use the amount from your last W-2 form to have an idea of your yearly income. Debt to credit line is dividing your total debt amount by your total credit line.

Debt to income is taking your debt and dividing it by your yearly income. You now have two percentages. These percentages should be below 33% (.33) according to most financial experts. If you want a good rate on your mortgage, you should at least pay down this debt to make your ratios below this thresh hold. Of course, the lower you go will be better. Along these lines, your mortgage payment should be between 25% and 30% of your monthly income (yearly income divided by 12). Realize that you will be paying utility, phone, and maybe other bills connected with your home, and then there is food and other living costs (like clothing). Sit down to plan out a possible budget at this point to see what you can afford. Ask people that you know, who live in homes, what their monthly expenses are to give you an idea what you might be spending. My wife and I wanted a home in a certain neighborhood, so we went with the higher percentage of income to buy the home that we wanted. There are times that I regretted that decision when I am paying monthly bills, but our plan has worked out. Lenders do not take your life style into account, so they will offer the loan based on your financial numbers, and this may not be right for you. This makes a predicted budget important to your understanding of which home that you can afford.

3.How long is your credit history- Here is a mistake that I made. When I was newly married, I ended up with some debt.

Frustrated with the credit card companies, I cancelled my cards once I had paid my debt. Thus ending my credit history, and beginning anew. How long you have possessed credit effects your score. The longer history is better for your score.

Do not cancel cards; just hide them away. If you cannot obtain an unsecured credit card (a card where you have no asset in the possession of the credit agency), arrange for a secured card. These cards require that you place up money or some other collateral to ensure that you will pay. With a good payment history, you can obtain an unsecured card.

Note: if you do not pay the debt on a secured card, the lender can confiscate the asset or money. You will want some type of history to obtain a good mortgage. I managed to find a reasonable mortgage with my mistake, so do not let the lack of a really long history deter you.

4.How often are you applying for credit cards? My mail box is flooded with credit card offers each week. One company sends me six offers per week every week. I am loved. Apply for the credit you need, not the credit you want. If you have a couple of cards, then stick with them. Having a fat wallet with a lot of cards will only cause you to pay higher rates.

The more you apply causes credit reporting agencies to look unfavorably at your financial history. An exception to this rule of more applications is bad is applying for mortgage loans. Apply for as many as you want to find the best deal, but do it within a two week time frame. Credit reporting agencies consider all mortgage applications within a two week span to be one application for their records.

5.How many credit accounts do you have? This is related to the topic above, but in this case they are looking not at the number of applications, which could have been denied, but at what you have. From my own experience, the mortgage broker told me that I should have at least five lines of credit, which I should have kept for a while. I did not need to be using them though. They needed to be active, but they could have a zero balance. At this point, I want to mention that the type of credit you have is important to the score. If you have credit at a rent-to-own style store, your credit score goes down. I did not find an explanation for this, except that you are perceived as not being able to purchase the item in a more acceptable fashion.

My next step was to look at my credit report. You can obtain one report for free each year from all three major credit reporting agencies: Experian, Equifax, and Transunion. I do this through the government’s web site, usa.gov. When you go to this site, look for the topic titled “Consumer Guides”. This will bring up a list of helpful sites or documents produced by different departments. This site has a lot of useful information on various subjects, but there are two here of immediate interest to you: Homeowner’s Resources; and Credit Reports- Free. Right now, I need the my credit report so I click on the latter link. It brings me to the page annualcreditreport.com. This page has some information for you, but what you need to do is click on the link “request a report” for your own report. You are going to fill out some forms, and you will have to pick an agency. All of the forms on this site and on the credit agency’s site are to determine who you are and that you can prove this fact. They will ask about an old address for example. Once you have selected an agency, you will be directed to their site. Each agency will try to sell you some type of plan or service, but you do not need to do this. Usually the plain button at the bottom of the page will take you through the process of getting your report for free.

Generally the process is a bit like the checkout steps at any internet retailer. They do have a verification process to check that you are the person who the report is intended. Once you have finished your check out, they create the report for you. This may take a moment, so be patient. Each company presents the report differently, so read what is happening on the page. You want your full report; you may have to look for a button to link to it, since they may have only a summary at first. Remember to print or otherwise save your report. They will ask if you want to be on their e-mail list. Yes, they will send you messages about services that they want you to buy, but they also have news letters about handling your credit. The services can be helpful if you have been a victim of identity theft. There will be a button to link back to the annualcreditreport.com site. Go back to this site when your are done. You can go through this process for all three at this site. Close your browser once you have the reports that you want. Some scam artists can track your information, when you log onto another site. Any time you are dealing with a financial matter on the internet, close your browser between sites.

I have my report, so I need to go over it to check for accuracy. I read a statement in one of my library books from an executive in this industry which stated that 90% of the reports have some inaccuracy. This number is incredible, considering how much financial institutions are relying upon it for their dealings with us. Common problems are people with similar names, who live close to one another, will find that the agencies will not distinguish between them. Juniors and Seniors in a family will have this same issue. There are some pretty fantastic ones where the agency will assume you are the same person as someone else, because someone typing in the information decided that the two of you were one person. Some mistakes are typing errors done at a financial institution that are provided to the reporting agency. I only find one mistake on mine. A dispute that I had with a credit card company relates their version of events, but it does not state all of the facts. Pretty minor compared to what you might find. To correct this, all three sites have information on how to dispute your report. They will have a page during the checkout process dealing with coming back to their site and dealing with a dispute, so you will want to pay attention to how this is done. Follow the steps that they outline, and remember to check back with them. You should keep records for yourself, when you are dealing with lenders you may want this data. The agencies may be slow in making a correction that you want. Just go over each entry to see if it matches your records. You will see any record which has some relevance to your current financial history. You will also see who has been checking up on you. Many of these firms are requesting your report, because they want your business. As long as the inquiry originated with them to solicit your business, and not with your request for credit, the number of these inquiries will not matter.

Once you have dealt with your report, you might notice that there is no score. For that you will have to pay extra. You do not really need to know your score, but it can always help. Here is a way to obtain a score without paying. Go to the web site E-Loan, www.eloan.com. This site can help you find a mortgage if you wish, but the site has a means for calculating a credit score, which uses a similar method to FICO. Go to the Tools & Calculators tab. Under the Home Equity tools, you will see Credit Reports and Scores. Under this topic, you will find Free Credit Score. There is an “order now” button. Do not worry; it is free. More forms to fill out, and you will need to create an account. There are some steps here to go through to obtain the score. My only problem at this stage was during the verification process. They asked for a credit card number to match up with my report. My card number had changed, and the physical card that I used was not accepted. I had to type in my home loan number for the score. The lesson is that you need to look at your report to find a card number that will work. This produces a score that is close to the sores produced by the reporting agencies.

You want a score above seven hundred to obtain the better rates. I think this step is helpful. I read where some lenders were pushing their customers into subprime or other loans meant for people with poor credit scores, because they would earn more money off of them that way. I am glad that they remember that greed is a sin.

Another method for obtaining a range where your score might be is on the site Credit.com. I found this site to have a great deal of information, so take some time to explore it. You will find that they have listed a way to find your score on the main page. You will need your report. They will take you through some questions (they do not look up the report like E-loans). After you have completed the forms, they provide you with a score range. What I like about this site is that they followed up with an e-mail containing advice about my credit situation, and how I could improve it. Of course all of these sites want to sell you a service. Unless you are or have been a victim of credit fraud or you do not feel that you can be vigilant on your own, you do not need them.

This is where I end. There are other web sites, but I think you only need the ones that I took on my journey. I found that I am doing well, which really surprised me. You never know how this will end up. At this point, you will have the information to proceed knowledgeably. If your score is below 700, or there are a lot of mistakes on your report, you may want to deal with this first. Go through the dispute process, and take the steps to improve your score outlined above, before applying for a mortgage loan. When you have done what you can, you may find that you can obtain a reasonable loan with a score below 700, so do not let a low score stop you. For the loan, I suggest that you settle for nothing less than a conventional fixed rate mortgage. If you do not understand all of the ins and outs of interest rates or other details for different types of loans, you can find yourself in trouble quickly. With a fixed rate loan, your payments remain the same basically. Why do I write “basically”? Well, there is one trick up your lenders sleeve, and that is the escrow account. I go into the escrow account in another section, but briefly, the bank can require that you pay more money into this account if they feel that the taxes or other items paid by this account will have a higher cost. Understand what type of mortgage your being offered, and what that entails, so maybe another trip to the library for books on mortgage loans is in order.

Update: Now that we are in the throes of our collective financial meltdown of 2008 and 2009, most firms that relied on FICO scores are re-evaluating how they can be used and what the scores mean. New ways of determining your score are being developed, but after re-reading this post, I find that the basic information here is still sound. Follow these steps to head in the right direction with your finances.

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© Frank Schulte-Ladbeck Professional Home Inspector Houston, Texas
Frank Theodor Schulte-Ladbeck
home inspector, TREC# 9073
Houston , Texas , 77063 United States
713.781.6090

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