'Rapid rescoring' of credit may make mortgage numbers work
WASHINGTON — 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? Shouldn't 30-year fixed rate loans well below 5 percent be in great demand? Economists say part of the reason for the sluggish movement is the expiration of the federal home purchase tax credits, which encouraged thousands of buyers to accelerate their transactions. To qualify, contracts had to be signed by April 30.
Other key factors at work include more stringent underwriting standards imposed by private lenders; declining consumer credit scores; and rule changes by Fannie Mae, Freddie Mac and the Federal Housing Administration. Qualifying for a new mortgage is now 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, says millions of Americans' scores have dropped over 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 FICO scores of 740 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 of work-arounds and creative solutions. For example, say your credit scores appear too low to qualify for the mortgage you need to buy a house. Ignore the online and junk-mail "credit repair" come-ons that promise miraculous FICO score improvements overnight. They are often ripoffs and may not even be legal.
However, an experienced mortgage broker or retail loan officer can try to get your credit file into a "rapid rescoring" program. 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.
If there are documented errors in the file, or omissions that are dragging down your scores, the rescorers connect you, your creditors and the national bureaus — Equifax, Experian and TransUnion — to get the problems fixed. In some cases, rescorers can spot steps that will boost your score immediately, such as cutting your use percentage on a particular account.
Marty Flynn, president of Credit Communications Inc., a credit reporting firm in San Ramon, Calif., says 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 25 to 32 points.
In other words, if you've been an irresponsible deadbeat, rescoring your files won't help much or at all.
Larger jumps are possible, said Dale Di Gennaro, president of Custom Lending Group, a mortgage brokerage in Napa, Calif. In one recent case, home buyers whose scores had been in the mid 600s reached the 700s when rescorers helped eliminate a late payment dispute on their three bureau files.
But if you have a complicated case, be prepared to pay. 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 can be reached at firstname.lastname@example.org.