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FICO’s newly announced FICO® Score 10 Suite is getting a lot of attention and news coverage. Let’s cut to the chase:
What does this new score model mean to you now?
Short term answer for all borrowers: “Nothing.”
Medium term answer for all borrowers: “Maybe, in a few years, depends on what you’re using credit for, we’ll talk…”
Short to medium term answer for home buyers and mortgage lenders: “Most likely nothing.”
Historically, lenders have been slow to adopt new models from FICO®. If the lender doesn’t use it, it means nothing to the borrower.
The new FICO® model version is number 10, the most popular version in use is 8 (from 2008) and for mortgage lending Versions 2, 3 and 5 (1998-2004) are used (because they are mandated by Fannie Mae and Freddie Mac).
For home loans, when you see headlines like: “Fannie Mae to Adopt New Credit Score Model,” that’s the time to pay attention.
What’s my credit score confusion
Different FICO score models are used by different lenders for different purposes (auto, credit card, mortgage). Adding more confusion are the score models developed and promoted by the credit bureaus; these are almost always higher than the lender’s score and cause the most disappointment when borrowers get their mortgage score from a loan officer. See: “Free Credit Score Can Confuse Homebuyers.”
A year ago we registered Credit Security Group as a business on Google. This month we passed the 100 mark in 5-star reviews from our clients.
We are very grateful for our clients and appreciate that so many have taken the time to tell about their experience on Google reviews.
And, we’re very grateful to our mortgage professional partners who refer these folks to us so we can be of help.
From our analysts Eddie, Mike, Lance, Rosalind, from our Research staff , Diana, Angel and Mary and from everyone at CSG: Thank you!
How do you know the effect of a single late payment on FICO score?
A FICO score is a number predicting future credit performance based on credit history. Like any person’s past, it’s difficult to say precisely what was the effect of a past event on the present.
Past credit events and current FICO scores are the same way.
We’ve analyzed tens of thousands of credit files, hundreds of thousands of negative events, databased before-and-afters… We know how negative events affect FICO mortgage scores – and how many points they cost the borrower.
This is what we do. But, it gets complicated.
It is extremely rare to see the effect of a single negative event by itself, shown this clearly, in the FICO score. That’s what makes this recent credit file special.
This file that isolates and reveals the cost of a recent 30-day late – all by itself – on the borrower’s score. So obvious that anyone can see it.
A late payment only on one bureau’s credit file
This borrower had an inaccurate 30 day late payment on his credit report. The creditor notified the bureaus. Somehow, TransUnion didn’t get the message. It remained in their file and not in the others.
Here’s the score result:
The TransUnion score was 61 points lower than Experian and 63 points lower than Equifax. The difference is due only to the late payment.
For most people, this 60+ point drop would be astounding. And far too many think that after they catch up, any harm goes away.
Wrong. They were late paying; it’s still part of their credit history. Usually, this is the most surprising thing for borrowers when we teach it during our education phase.
Now imagine this happening after approval and before closing.
That’s why we constantly remind borrowers to be perfect with payments during the buying process and recommend mortgage professionals do the same whenever they can.
FICO mortgage scores are different than other credit scores in this situation
FICO score models used for credit cards and auto loans are very different. Bankcard and auto scores are based on FICO 8 model and are much more forgiving of single late payments – and lower amount negative items.
This is one reason your free FICO scores from your credit card provider, or free scores from a website, can be much higher and misleading when you apply for a mortgage. (See Free Credit Score Can Confuse Home Buyers )
Two other factors affecting late payments and FICO scores
This late payment occured eight months ago. By FICO standards this is considered “recent.” Its effect on the score is very high; but will fade over time (See Time Heals; Recency Kills.)
We also need to bear in mind another rule: the higher the start, the greater the fall. With a lower score, this event would have less impact. (See Credit mistakes and credit scores: the higher you start, the farther you fall.)
New standards on public records reporting
The new standards on public records reporting at the three major credit reporting bureaus went into effect July 1, 2017. There’s been quite a bit of confusion in the the lending world about what this means.
One thing is for certain: many public records that used to be found on credit reports are no longer there.
Lenders are still responsible for knowing this information, and other service providers are filling the gaps to provide it, usually at additional expense to the lender. But what is the effect – now – on credit scores?
In February of 2018, the Consumer Finance Protection Bureau (CFPB) released a report of their findings on the impact of the new requirements on credit scores.
John Culhane Jr. of Consumer Finance Monitor analyzed these results in his article: “CFPB report finds removal of public record data has small effect on credit scores.” The title tells you his summary of the CFPB analysis.
How many public records were removed from credit reports due to the new requirements?
The first key point is the scope of public records removed from credit files at the major bureaus:
In June 2017, soon before the new standards were implemented, 6 percent of consumers had a civil judgment or tax lien. As a result of the new standards, about 83 percent of these consumers lost one or more judgments or liens in July 2017. After the new standards were implemented, only 1.4 percent of consumers had a tax lien on their credit reports.
That’s a huge percentage of those who had public records who no longer have them in their credit file at the bureaus – gone from their report, scoring model and FICO mortgage score.
What is the result on credit scores?
The second point is the most surprising:
About 4 percent of consumers with civil judgments or tax liens on their credit reports in June 2017 experienced an increase in their credit scores in September 2017 due to the new standards.
Only four percent.
How can removing judgments and liens have such a small effect on credit scores?
The CFPB has one possible explanation for this:
The CFPB seems to suggest that the small effect might have been expected because consumers who had civil judgments and tax liens also had more delinquencies and more derogatory information in their credit reports.
Culhane posits a different take on the report:
The new report’s findings might be seen as subtle criticism by the CFPB under Mick Mulvaney of the Plan and former Director Cordray’s CFPB. In other words, the report’s findings could be seen to show that the concerns about the reporting of civil judgments and tax liens that drove the [National Consumer Assistance] Plan were largely overblown.
Will public records reappear on credit reports in the future?
The changes to the standards were part of the National Consumer Assistance Plan:.
The NCAP was the result of settlement agreements between the NCRCs [Nationwide Credit Reporting Companies – Equifax, Experian, TransUnion] and over 30 State Attorneys General… Starting July 1, 2017, public record data furnished to the NCRCs for inclusion on credit reports had to contain name, address, and Social Security Number and/or date of birth, and had to be refreshed at least every 90 days.
Theoretically, this could be fixed going forward. Whether these requirements are met and these public records make it back into credit reports remains to be seen.
We’ve helped mortgage professionals close over a billion dollars in home loans. If you’re a mortgage loan officer or broker, please visit our page For Mortgage Professionals to learn how and why to refer your borrowers. Or contact us to discuss how we can help you.
If you are selling your home and there is a judgement lien, does this have to be paid first?
Not in Texas according to Attorney T. Alan Ceshker.
Recently, we had a client who was refinancing his house and an old judgment popped up. The lender said he had to pay it; he came to us hoping we could delete it. We remembered the Texas law on this and reached out to Alan for help.
Ceshker is a practicing attorney with a title office that routinely runs into these situations. He has been successful in getting the lien partially released from the homestead in every instance – several hundred times in the last 20 years.
According to Ceshker:
A judgment recorded in the real property records is a lien on all real property of the defendant. But the Texas Constitution and the Texas Property Code specifically excludes this lien from attaching to a person’s homestead.
Despite this clear statement of law, a title office will still require a partial release of lien (i.e. releasing the homestead property to be sold or refinanced).
If the judgment creditor will not release the lien for the specific homestead property, there is existing caselaw that will allow damages to be recovered if the judgment creditor does not release the lien (Tarrant Bank vs. Miller 813 SW 2d 666 (Tex. App. – Eastland 1992, writ denied).
A conventional title office (non-attorney owned) will not be able to act on behalf of the judgment debtor to get this removed.
You can reach Ceshker via his website, The Law Offices of T. Alan Ceshker, PC, or by calling 512-961-7848.
“Build credit” is the advice given by loan officers and banks every day, hundreds of thousands of times a day. We wonder how many of those people are being hurt from advice to “build credit.”
In this post we want to warn of the danger of giving this advice to the wrong borrowers and illustrate how it can damage loan opportunities.
A recent case example
A past client came to us to help increase his score to do a cash-out refinance for some home improvements. (We’d help him purchase the home in 2017.)
His mid-score now is 694. According to his loan officer:
His debt-to-income ratio, loaned value in the house, and a 680-plus credit score would normally result in automated approval at Fannie and Freddie. But the loan officer can’t get automated approval. Automated underwriting findings were flagging a lot of recent accounts and inquiries.
He had opened eight accounts in the past 12 months which really hurt his loan opportunities. Why did he open the new accounts?
He went to his credit union and mentioned that he really needed his scores higher. And they suggested that he to open up installment accounts; that he needed to build credit. Bad advice for him.
When is “build credit” good advice?
Building credit is what someone does when their credit report is blank; 18-year olds build credit. Building credit applies to people without any credit history.
Most older people have already built credit history that is being scored.
When else can opening new accounts help?
There are those who have credit history, but lack certain types of open accounts. Here, opening new accounts can help. But only the right types of accounts and only after a detailed analysis of their credit file and loan program.
This is critical to make sure new accounts will increase your borrower’s score – not lower it.
We first applied for and were granted accreditation by the Better Business Bureau in May, 2009. We greatly appreciate the work they do in our industry by helping people find businesses they can trust.
We realize that when you refer your borrowers to us, both of our reputations are at stake. That’s why everyone on our teams works to make sure that every borrower is helped and is treated with great respect and honesty.
After analyzing tens of thousands of credit reports, one conclusion is all too clear: any negative event will severely lower a FICO score. But how much?
Every credit file is unique. Any credit event, whether a new account, an inquiry or late payment or collection will be scored as it fits into the whole of the credit history. The only way to fully understand the events impact is to analyze the whole credit file, something only our analysts can do.
Given this caveat, we can make some general statements and give ball-park results.
The best way to understand how much a negative event will lower your score is to remember one key rule: the higher you start, the farther you fall.
For example, if an 800 FICO score gets one $10 medical collection, the score could drop close to a 100 points. This effect of this same collection on a 680 FICO score is roughly half: around 50 points.
Paying the collection does not get any points back in either case.
Some would think that a 30-day late is just a minor boo-boo. After all, maybe it was only on a little department store card with a monthly payment of $15.
In reality, scores can drop significantly – enough to dramatically change the terms of a mortgage or an auto loan. An 800 score could lose up to 70 points on that 30-day late. For a 680 credit score, the fall could be 50 points.
Always remember this, there are no boo-boos in the credit world, only bombs and bigger bombs. You must be flawless in paying bills on time; you must avoid anything derogatory.
Few things in our lives require absolute perfection every day, every month and every year. Credit is one of those things.
‘Let’s dispute it and take it out of score.’
Loan officers miss this a lot and so do consumers.
Many believe – and try to use the tactic of – “Hey, let’s dispute this account online. Put it in dispute to take it out of the credit score.”
Things have changed since this tactic began over 12 years ago. The mortgage world responded and now it’s just not that simple or effective. Unfortunately, this fallacy persists in the mortgage industry.
Disputes can also kill loans
Today, there is the additional problem of accounts with dispute wording killing a loan program:
“I have a lot of people hiring attorneys to dispute everything from kingdom come and back. And then they come to us and want to do a conventional loan, and it ain’t happening.
I just spent about $700 of my company’s money to remove a ton of disputes that somebody paid a couple thousand dollars to put in there in the first place that actually did nothing.”
– Senior Loan Officer
Reinvestigation vs. in dispute
There’s an assumption that when you write a letter or dispute something online, which creates a 30-day investigation (called a reinvestigation under the Fair Credit Reporting Act), that you are putting the account “in dispute” and removing its effect on the credit score.
But reinvestigation and “in dispute” are two different things.
Disputing an account means that in 30 days an investigation will be completed, in 30 days or less. At the end of that investigation, the account can look exactly like it looked before or have some changes the investigation produced. But it’s wrong to assume that because it was disputed, that the account will be “in dispute.”
This goes back to the Metro 2 code where there are very different types of disputes: disputed by consumer, dispute resolution pending, dispute after resolution. One of those may or may not be on the account when it’s over.
Don’t assume that disputed equals out of score
And, that brings us to our main points:
- Not every disputed account will remain in dispute when the investigation is completed.
- Not every account that is in dispute when the investigation is completed is out of the scores.
Disputing accounts has a valid function when used correctly
Disputing information at the the credit bureaus and with creditors is sometimes warranted and of value to the borrower.
There is a valid use but always with the loan program in mind – and after a thorough analysis of the full credit file and the borrower’s situation, goal and time frame.
Mortgage professionals should very wary of so-called credit repair companies that advise disputing all negative accounts.
Increasing FHA loan limits is very good news for homebuyers getting squeezed by increasing home prices.
“The FHA loan limits for Texas were increased from 2017 to 2018. At least in most counties… The maximum mortgage amount for most of the state is $294,515, for a single-family home purchase. Higher limits are allowed in areas with higher home prices, like the Austin and Dallas metro areas.”