Helping buyers get better credit

Mortgage brokers move buyers into 'rescoring' programs to improve their chances of qualifying for a home loan

Call it the great real estate disconnect of 2010: Mortgage rates have been at half-century lows and home prices have stabilized, but applications for mortgages to buy houses have declined most weeks during the past three months, as measured by the Mortgage Bankers Association.

What’s going on here? Shouldn’t 30-year fixed-rate loans well below 5 percent be flying off the shelf? Economists say part of the reason is the expiration of the federal home purchase tax credits, which encouraged thousands of buyers to accelerate their transactions — starting with mortgage applications — into the early spring months to qualify for the April 30 contract deadline.

But other key factors are at work: More-stringent underwriting standards imposed by private lenders, declining consumer credit scores in the wake of the recession, and rule changes by Fannie Mae, Freddie Mac and the Federal Housing Administration have all combined to make qualifying for a new mortgage more challenging than it has been in years.

Take credit scores. While most lenders have raised the bar on minimally acceptable scores, Fair Isaac Inc., creator of the widely used FICO score, said there has been a deterioration in millions of Americans’ scores during the past two years. More than 25 percent of all consumers who have active credit files — roughly 43 million people — now have FICO scores of 599 and below. On Fair Isaac’s scale, which runs from 300 (highest risk) to 850 (lowest risk), a 599 score is considered unacceptable by most lenders.

In fact, since the housing boom went bust, lenders prefer to see minimum scores well into the 700s. Fannie Mae, for instance, gives its best combinations of rates and fees to applicants with 740 FICOs or higher.

How can buyers deal with the tougher rules on everything from minimum scores to debt-to-income ratios? Tops on the list: Be aware that there are work-arounds and creative solutions to some of the roadblocks. For example, say a buyer’s credit scores appear too low to qualify for a mortgage. They should ignore the online and junk-mail “credit repair” come-ons that promise miraculous FICO score improvements overnight. They are often rip-offs and may not even be legal in some instances.

However, an experienced mortgage broker or retail loan officer can get a buyer’s credit file into a “rapid rescoring” program that just might get them the legitimate lift they need to qualify. Rapid rescorings performed by independent credit reporting agencies — most of them members of the National Credit Reporting Association — use procedures approved by the three national credit bureaus to make direct changes to the information contained in credit files.

Sign Up for the undefined Newsletter

If there are documented errors in the file, or omissions that are dragging down a score, the rescorers connect a buyer, their creditors and the national bureaus — Equifax, Experian and TransUnion — to get the problems fixed. In some cases, rescorers can even spot steps a buyer can take, such as cutting their utilization percentage on a particular account, that will boost the score immediately.

Marty Flynn, president of Credit Communications Inc. in San Ramon, Calif., a credit reporting firm, said most rescorings take from three to five days and cost an average of $30 per “tradeline,” or credit account, per borrower. A typical rescoring may cost anywhere from $90 to $200. Though extensive rescorings can push FICOs up dramatically, Flynn said the average increase is more like 25 points to 32 points. If the buyer has been an irresponsible deadbeat, of course, rescoring the files won’t help much or at all.

Dale Di Gennaro, president of Custom Lending Group, a mortgage brokerage in Napa, Calif., said he uses rapid rescorings to help clients raise their scores enough “to get them into the loan program that’s best for them.” In one recent case, he said, homebuyers whose scores had been in the mid-600s boosted them into the 700s when rescorers helped eliminate a late payment dispute on their three bureau files.

Steve Stamets, a loan officer with Union Mortgage Group in Rockville, Md., said rapid rescoring can rack up transaction costs — and even pinch loan officers’ revenue — when an applicant’s scores are being depressed by issues in multiple accounts. One recent applicant had problems with three separate credit tradelines, throwing the entire mortgage application into jeopardy. Straightening them out cost $270.

“We got [the client] above the 620 FICO he needed” to be approved for the mortgages, said Stamets, “but believe me, it took some work.”


Ken Harney is a syndicated real estate columnist.