Do most of your clients check their consumer credit score before getting pre-approved for a loan?
- No. (61%, 109 Votes)
- Yes. (39%, 69 Votes)
Total Voters: 178
In late 2012, the Consumer Financial Protection Bureau (CFPB) compared credit scoring models used by lenders against those commercially available to the public. The three models put through the fire were FICO, VantageScore and “educational scores” marketed to the public by the credit reporting agencies (TransUnion, Experian, and Equifax).
So, did the scores match?
No. But for most buyers, they’re close enough. The study divided scores into four credit quality categories:
- above 740;
- 620-680; and
- below 620.
The different credit scoring systems placed buyers into the same credit-quality category about 75% of the time.
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Buyers don’t need to worry about a variance in credit scoring by different agencies. Lenders typically rely on a FICO-based score for determining creditworthiness, so have them focus on that. FICO is the best bet for getting a free peek at what the lender will eventually pay to see.
The more important message is this: buyers need to get a free copy of their credit report, check it for accuracy, and then monitor it regularly. Errors, not scoring models, are the most damaging factor to a score. Your buyers have control over errors.
With the credit report inspection out of the way, counsel your buyers on what they can do with the credit they’ve got. For instance, a foreclosure will stay on the report for seven years. During this time, obtaining a mortgage is made more difficult by lenders.
However, if this mortgage default is the solitary negative item on their credit report, this means the buyer’s other debts are paid timely. A buyer’s score improves in as little as two years if the only credit issue is failure to pay off the mortgage as agreed.
Lenders categorize credit scores as subprime, near-prime and prime. Each type of credit is assigned a different interest rate based on the risk of default the lender perceives exists with the buyer. Generally, a score of 620 or below is in the subprime range. A score of 760 or higher is typically considered prime.
The Federal Housing Administration (FHA) requires that a buyer has a score of at least 580 to qualify for a loan with a 3.5% down payment. Buyers with scores between 500 and 579 are typically required to put 10% down on their mortgage. Anything less than 500 is ineligible for FHA-insured financing.
The FHA only requires three years to pass after a foreclosure or short sale.
Often, buyers can qualify for Frannie-backed home loans three to seven years after a foreclosure. This depends on the circumstances surrounding the foreclosure. Oftentimes this waiting period can be reduced or avoided with a larger 20% down payment.