Real Estate Finance Alerts

Why does your credit score matter now more than ever?

Fannie Mae and Freddie Mac recently changed the credit score risk adjustments for conforming loans.  Prior to these changes, credit scores for full documentation conforming loans had little or no impact on interest rates and most conforming full doc loans were the same for credit scores from 620 to 820.  With the changes announced late last week, depending on the lender and the loan type, the new adjustments start with scores as high as 740 and go down below 620 adjusting every 20 points.  Furthermore, the adjustments can be as high as 2.75 points for purchases and or rate and term refinances and as high as 5.750 points for a cash-out refinances.

The changes affected two of my clients this month.  A client in Texas buying a home had a confirmed error on her credit report, but we did not have time to correct it since she closed two weeks from the contract date.  She had to pay an additional 1.25 points on her loan for the same rate or increase her interest rate 0.375% compared to her rate if we had time to correct the error.  Another example is a client who had to pay 0.500 point for a lock extension while we corrected an error or go to current rates that were 0.500% higher.  In the last six months, nearly 40% of my clients’ credit reports contained errors that would have cost them money with the new credit score adjustments. 

Consider a 30-year fixed cash out refinance loan for $300,000 to 80% loan to value.  If you have a credit score of 639 instead of 700 due to a credit report error, you will have to pay $9,750.00 in points at closing or increase the rate on your loan from 6.00% to 7.25% costing you $100,000 in total interest.  Even for a purchase putting down 25%, if you could improve your credit score only 21 points from 659 to 680 by paying down a credit card and completing a balance transfer, you could save $3,750.00 at closing or decrease your rate 0.375%.  I recently corrected credit reports for three different clients and increased each of their scores over 100 points for errors seemingly as minor as a single late credit card payment and a $29 medical co-pay collection.  

What do you do? 

You need to ensure you have time to make corrections or improvements to your score.  Typically, correcting an error can take 2-4 weeks while payments and other score improvements can take 1-2 weeks.  Get pre-qualified at least a month in advance if you plan to buy a home.  For a refinance, you should get pre-qualified now because, while you never know when rates will go low enough to refinance, you must be ready to lock on a moment’s notice; for a few hours on the morning of 1/19/08, rates were as low as 5.125% for a 30 year fixed loan. 

Why is credit monitoring not enough?

Credit monitoring is insufficient for several reasons.  First, while it may help identify an error, credit monitoring only permits the standard dispute options that take 30 days or more and often do not resolve the error.  Second, the scores from credit monitoring services are not the same scores used for obtaining a mortgage and can be off by 20 points or more.  Finally, and most importantly, you can often remove derogatory items on your credit score that are technically accurate depending on your credit history and if the creditor follow proper procedures.

Why use Huettner Capital?

Huettner Capital has the experience and expertise to quickly identify and correct credit report errors in addition to techniques to maximize your credit score.  Furthermore, we do this at no cost as a part of the loan process and only charge for the actual fees from the credit reporting agencies to research and update the credit report.  Other credit services charge hundreds or thousands of dollars and do far less.

Contact us today to get started.