One of my December columns introduced the concept of alternative credit as a useful tool in helping applicants to overcome their lack of traditional credit scores as a barrier to homeownership. To review, lenders will insist on reviewing the credit profile of an applicant by running a credit report and checking the 3 digit FICO (the Fair Isaac and Co. model) score to see if it fits within a particular loan product’s parameters. Those applicants who have never established credit for themselves via credit cards, student loans, car payments, etc. are often able to obtain approval for a mortgage loan by providing the lender with letters of good standing from landlords, insurance carriers, cable companies, and the like. The topic of credit is a good one to re-visit periodically. When I recommend to my clients to look at an updated credit report at least once a year, I am often met with the response, “I don’t like to have my credit run because it will lower my score.” This is one of the more common concerns that I encounter, particularly from mortgage shopper who are reluctant to allow each lender/broker they speak with run a report. Concerning credit, too often confusion reigns. Consider the findings of a survey of 1027 consumers co-sponsored by Consumer Federation of America and Providian Financial. 122 respondents considered their knowledge of credit “excellent.” Yet, of that group, 56% believed that married couples receive a combined score, and only 41% knew that credit scores measure risk. While the issue of credit scores and the formulas that are used to calculate them can be extremely complex, I am typically asked the same few questions by my clients. So that I may give accurate information, I, too, strive to keep my credit knowledge up to date by reading the various reports and bulletins issued by the credit report service that I use. First, to address the concern that too many inquiries will damage a credit rating, credit scores do not immediately suffer when a report is run. Just as mortgage lenders and brokers do not consider credit scores only, the credit bureaus consider the circumstances behind the credit inquiry. In other words, context counts. Specifically,
the credit bureaus understand that when people are shopping for
a car, a mortgage, or some other major purchase, they are apt to
shop around before they make their decision. In the mortgage industry,
each lender that is approached will, understandably, request consent
to inquire into the credit profile. To accommodate mortgage shoppers,
the credit bureaus (Equifax, Experian, and TransUnion) will consider
the four credit inquiries made by four different mortgage companies
with 30 days as only one inquiry. Thus, people in need of a mortgage
loan should not be dissuaded to shop based on the false belief that
their credit will suffer. A good rule of thumb is to keep the inquiries
to within 30 days of each other. |
