As of January 1, 2011, loan applicants will be informed of how their credit scores affect the mortgage rates offered from a lender. The new disclosure, to be given to borrowers before they enter into a loan, is the result of a consumer protection effort initiated by lawmakers in 2003. After a negative action has been taken regarding an application for credit, borrowers will receive information from lenders covering:

  • their specific credit score along with the source and date it was pulled;
  • the rank of their credit score among other homebuyers’ scores;
  • key negative factors that adversely affect their credit score;
  • a reminder of the legal rights of consumers to dispute any inaccuracies affecting their credit;
  • information about how to obtain free annual credit reports, one each from Equifax, Experian and TransUnion; and
  • a description of credit score methodology.

first tuesday take: The new lender disclosure requirement is a step in the right direction for the majority of homebuyers who know very little about the weight of their credit scores in determining the mortgage interest rates for which they qualify. But again as we keep repeating, responsible agents have their buyers shop at least two lenders before deciding from which to borrow. [For more information regarding mortgage shopping, see the December 2010 first tuesday article, Homebuyers shop around for everything but their mortgage and the May 2010 first tuesday article, Shop, shop, shop until you drop; for more information regarding the economic IQ of homebuyers, see the September 2010 first tuesday article, The era of the financially illiterate homebuyer.]

Many borrowers who experienced job loss and subsequent foreclosure during the Great Recession are now shopping for a new mortgage and a fresh start, burdened with a credit score tainted by past mistakes. If lenders determine these borrowers present too great a risk of delinquency, lenders will provide a loan with less advantageous terms or issue a Denial of Credit form, which lists each newly required piece of credit score information. [See first tuesday Form 219]

If a homebuyer’s application is denied or features excessive interest rates, prudent agents advise their homebuyers to prepare and submit a Derogatory Credit Explanation Letter to the lender. This final step is a personal explanation of the events blemishing the homebuyer’s credit score, such as a foreclosure or default triggered by external negative economic conditions. If a loan applicant can demonstrate to a lender they present less of a risk of default than their credit score implies, a lender is likely to reconsider their application. [For more information regarding the Derogatory Credit Explanation Letter, see the December 2010 first tuesday Form of the Month.]

Ultimately, lenders are willing to do whatever it takes to increase their profit margin. With the economy on the mend and a high percentage of Californians’ credit scores in the trenches, lenders are beginning to look beyond a mortgage applicant’s credit score and hear out any sound explanation that paints the borrower in a responsible light. [For more information regarding lender credit score consideration, see the December 2010 first tuesday article, Lenders desperate to lend look beyond FICO.]

Re: “Lenders soon to disclose how credit scores affect mortgage rate quotes” from the LA Times