Posts tagged ‘risk-based pricing’

Your Credit Report (Part I)

     Part I:  What it is, and Why it Matters

It was the mid-1990’s, and I was traveling out-of-state to attend a one-day banking seminar.  The topic:  this new-fangled thing called credit scoring.  As automated underwriting systems were beginning to take hold in residential mortgage lending, the days of extensive manual review of credit histories to determine credit worthiness were coming to end.  In its place, a mysterious three-digit code based on secret algorithms would be telling us bankers what type of credit risk we should associate with our applicant. 

While much has changed since those beginning days of credit scoring, one fact has remained constant . . .  a credit report and credit score ranks at the top of important tools used when determining your creditworthiness.  Whether you are talking to your mortgage lender, your insurance agent, a car dealer, a new landlord or even a new employer, it is likely that your results will be impacted by what is being reported in your credit history.  They will use the information from your report to try to answer such important questions as: 

  • What is your willingness to repay debt? 
  • How much money can you borrow, and on what terms?
  • Will you make a good tenant?
  • Are you a good insurance risk?
  • Can you be an employee who is trusted?

Since your credit report has such far reaching effects, let’s learn more and debunk some popular myths while we are at it.

What is a Credit Report?

A credit report may be several pages long, and will detail a list of items such as debt paid, open loans, credit cards, balances due, payment amounts, and collection accounts.  It also gives information about your identity (names, aliases, past addresses and employers), your existing and previous tradelines (all debtors who might report to the credit bureaus), your public records (foreclosures, real estate liens, income tax liens, and judgments), and recent inquiries into your report.  Because a credit report does more than just report on payments made and balances due, it is also used as a tool to combat fraud.

Your creditors may report your information to one, two or all three of the credit bureaus; Experian, Equifax and TransUnion.  Because there are 3 bureaus, and not all have the same data to analyze or the same scoring models, the typical mortgage credit report will give three different credit scores.  In mortgage underwriting, we use the middle score.

The myth:  A credit report does not know or comment on personal or household income.  Income is not a component of credit scoring (although its excess or lack thereof may have an effect on how timely payments are made, which DOES impact the score).

Another myth:  Although a credit report may show your date of birth, your age is not a component of credit scoring (however, the length of time accounts have been opened can impact a score, so age does have an effect on the score)

One more:  If you are married, your credit file is not completely merged together.  Only joint accounts will show on both spouses’ credit reports, otherwise, it will have completely different and individual information per spouse, with separate credit score ratings.  In this case of two or more applicants, we will use the lower of the two middle scores as the credit score for the file (the thought being that the lower score will bring the higher score down instead of the higher score helping to raise the lower score up).

What Does a Credit Score Try to Do?

The FICO algorithms are actually trying to calculate the odds of you having a 90 day late payment in a 24 month period on a loan obligation.  This is why the reporting of a payment made 90 days or more late will have such a negative impact on a credit score. 

A little-known fact:  Your credit score is based on a snapshot in time.  The score is calculated at the precise moment that your report is pulled.  Even if you always pay your credit card down to $0.00 each month, if you owe a large amount on a credit card at the same time that your credit card company happens to report your balance (mid-billing cycle, for instance), your score can look very different than if you happened to have a low balance at the time of their reporting to the bureaus.

Another little-known fact:  Sometimes payments are made late and aren’t reported to the bureaus as a late payment.  I have had customers who were very concerned about what their report might show because they were habitually making their payments a few days or even weeks beyond the due date.  A late payment is not reported as late unless it reaches more than 30 days past due.

Where Can I Get a Free Copy of My Credit Report?

For many years, banks were not allowed to share an applicant’s credit score with them because it was considered “proprietary” information.  This all changed with the FACT Act of 2003, when it became mandatory for creditors to share this score through proper disclosures to the consumer.  In answer to other aspects of that new regulation, the 3 credit bureaus designed a website where a consumer could request and acquire a free credit report from each bureau every 12 months.  There are a number of websites that have popped up offering this service for a fee, so it is good to know the official site:

Even though the report is free, be prepared to pay approximately $7.00 to get your credit score.  You can also contact them via phone at (877) 322-8228, or complete the Annual Credit Report Request form and mail it to:  Annual Credit Report Request Service, PO Box 105281, Atlanta, GA  30348.    

While checking and monitoring your credit report is a good idea at any time, it is especially important to do so if you have recently gone through a divorce, bankruptcy, foreclosure, short sale or medical emergency.

Little known fact:  If you check your credit report yourself, it does not count as an inquiry on your report and you therefore do not experience any decline in your credit score.

Helpful hint:  You can get a copy of your credit report for free at the above website, but now here is a tip that can save you some money:  Instead of using and paying for a credit monitoring service, you could pull from one bureau (Experian, Equifax, TransUnion) every 4 months.

What If There are Errors On My Credit Report?

You can dispute credit reporting errors yourself.  The best way to dispute an item on your credit report is online.  If you have pulled your own report from, you will notice a tab at the top of your report that reads, “Dispute”.  When you click on that tab, your report opens up and you can select the items you wish to dispute and use a drop-down menu to select the reason why this item should be removed/corrected/altered.  The Fair Credit Reporting Act requires that the reporting creditor either “prove it or remove it” when a dispute is filed.  Many home loan applicants have had great success getting their report to be corrected and have enjoyed a positive jump in their credit score. 

Your specific rights to review and challenge what is being reported is detailed in a booklet provided by the Federal Trade Commission here

Although this can be done by yourself, I would highly recommend that you speak with a knowledgeable mortgage advisor before doing this, especially if you are in the process of being approved for a mortgage loan.  There are some items on credit reports which, if changed, could have a negative impact on your score.  A difference in credit score could have a significant impact on the rates and terms you are being offered.  (See posting about What’s Happening With Risk-Based Pricing here)

A little known fact:  It can take a few weeks for a credit report tradeline to be updated, and then it will usually take up to another 5 weeks before the change shows up in the credit score.  This is why is can be so important to work on a pre-approval prior to starting the house hunt.   

How Can I Stop All Those Unsolicited Credit Card Offers?

You can opt out from creditor’s marketing lists by going to and submitting your information. 

What to Do Next?

Part II and Part III of this Credit series will continue the discussion by giving information on what hurts and what helps, and also tips on establishing (or reestablishing!) a credit history.

You can also contact me, Sherri Dyer, at (207) 288-2881 as I am happy to assist by sharing this type of information in more detail and tailoring it to your own situation.  With the changes in mortgage underwriting and risk-based pricing, it is more important than ever that your credit report looks spiffy!

~Sherri Dyer, Advisor & Mortgage Maven

writing for MDI Mortgage, a full service mortgage company located in Bar Harbor, Maine, Mount Desert island


May 27, 2011 at 7:47 PM 1 comment

Mortgages More Expensive? What’s happening with Risk-Based pricing.

Yes, it’s true.  Mortgage loans are about to become more expensive with the expanding risk-based pricing matrix from FannieMae and Freddie Mac.  This video highlights the upcoming changes:

“First, what is risk-based pricing?  A number of years ago, FannieMae and FreddieMac determined that certain loan characteristics carried more risk, and the borrower, or loan terms, that were in a higher risk category would pay higher costs.  This was generally a fair way to allocate cost.

More recently, they added a quarter point “adverse market” fee.  I like to call this a “the-government-sponsored-agencies-are-losing-to-much-money-and-are-simply-trying-to-cover-some-of-their-losses-fee”.  This pricing hit affected everyone who was granted a conforming loan over the past 2 years.  It may have been in closing costs, or in rate, but it was there, and it was across the board.

As of April 1st, 2011, the risk-based pricing matrix is expanding again, and what was once considered GOOD,  might now be considered high-risk.

For example, a borrower could have an 800 credit score, and have 20% down payment, and this is suddenly risky?  What once had no pricing adjustment now has a charge of .25% of the loan amount.  A loan amount of $300,000 would have added closing costs of $750, or perhaps a rate that is .125% higher, adding to the overall finance charges over the life of the loan.

It is interesting that a 680 credit score was once considered excellent.  Now, you can see that it would carry added closing costs of 1.75%, or $5250 on that $300,000.00 loan (or a rate that might be .25 – .375% higher.)

 Most of the new pricing adjustments are for an extra .25% in costs, across the board.

So, what does this mean? 

If a lender doesn’t sell the servicing to a mortgage, does that mean these fees don’t apply?

Unfortunately, most banks, whether small community banks or larger regional banks, underwrite to Fannie Mae and Freddie Mac standards, and they may sell these loans even though they keep the servicing.  It something that happens behind the scenes, and the borrower may not even realize it.  That will be a good topic to cover in another “Get Inside” video.  Basically, unless the loan is specifically a portfolio loan, also known as an in-house mortgage (and the rates on these types of loans are typically higher anyway), these pricing adjustments will apply.

Are there any ways to avoid paying these risk-based premiums?  Yes! 

A 15 year mortgage, or shorter, term is exempt from these new price adjustments.  Having a higher credit score, and a downpayment of 25% (or equity in the property if it is a refinance, of 25% or more) could be exempt from this new round of “what is a higher-risk loan”. 

A FannieMae Refi plus, and the FreddieMac Relief refinances are not being assessed these extra fees.  Not all the banks are offering these programs, but MDI Mortgage has access to these special, low cost loan programs and we have successfully negotiated some very favorable loan terms for our clients over the past few years.

There may be other options available for your unique situation, as well.  When you contact MDI Mortgage for advice regarding your mortgage financing, we investigate the many different loan options and choices, and present all the information needed in an easy to understand format so that you can be sure that you are making the very best decision, for you.

For more details about this change, contact me — I’m happy to help.”

Sherri Dyer, Advisor & Mortgage Maven

writing for MDI Mortgage, a full service mortgage company located in Bar Harbor, Maine, Mount Desert island

January 28, 2011 at 3:45 PM 1 comment

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Author: Sherri Dyer

Mortgage Maven

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