When someone contacts me by phone, seeking information regarding a purchase transaction, there are 3 pieces of data I want to know: 1) how's your credit? 3) what is your income? and 3) how much do you have saved for a down payment?

From my perspective, the starting point is the borrower's credit history. This is true whether you are purchasing or refinancing. If your credit is impeccable, lenders are less concerned that you will be late with a payment or default on the loan.

If you have great credit you may be able to get a loan for 95% of the purchase price. You may even be able to do this with a debt ratio in the mid-40's. You may be able to get a loan with 20% down and a 50% debt ratio.

Credit worthiness is measured by credit scores. See: for an explanation of FICO scores.

One thing that is becoming increasingly important is your credit report and the objective scoring systems associated with them. Every borrower must do everything possible to protect his/her credit. A leader in this is Fair, Isaac Co. which developed a scoring system for credit reports. Each credit repository now has its own credit score model.

(An hour before I wrote this I went to the College Board site and had my son's SAT scores transmitted to colleges that he applied to. Your FICO score is to getting a loan what his SAT's are to getting into college.)

FICO scores vary from the low 300's to a high of 850. A FICO score of 680 is considered good enough to not require any further review by an underwriter. An "A paper" loan may still be made with a 630 FICO score if reviewed by an underwriter. Some lenders offer premium pricing for borrowers with 700 or 740 scores.

Why do mortgage lenders pay so much attention to these scores? Real simple: there is a 1 in 8 chance that a borrower with a FICO score below 600 will be either severely delinquent or in default of their loan. There is a 1 in 1,300 chance that a borrower with a score above 800 will have similar problems.

A low credit score will hinder your ability to get a good second mortgage to a greater extent than getting a good first mortgage. This may, at first, seem strange. But, remember that holders of second mortgages do not have any realistic equity. Their positive feelings about lending you money are, thus, going to be based largely on your credit history.

FICO Scoring! Isn't That Like Nuclear Power?

There is a large amount of negative information on the WWW regarding FICO scoring and inaccurate information in credit repositories. There are numerous articles posted in user groups about credit scores. People complain about people who bear bad news. Democrats think that Ken Starr is a subversive. People complain about credit scores they way they complain about Microsoft or the police. It is fashionable, in our country, to hate the big guy and credit scoring is a "big guy" kind of thing. I have one simple bit of advice: get over it and learn how it works and how to use it to your advantage. Complaining about it will do no good unless you complain to the right people.

There are certainly cases in which people's credit has inaccurately been reported to be adverse. These folks need to remedy this any how to do so is discussed below.

How to Keep a Good Credit Score

- Never have a mortgage late. Sell the kids first!
- Never have any late payments. Duh!
- Don't have a sudden surge of credit activity
- Do not "tap out" your credit usage. From my experience, using more than 50% of a credit line negatively impacts your credit score. I have seen credit reports where there were zero late payments but the FICO score was below 640. These often fit the following: Mr. & Mrs. Mallrat have 4 credit cards, each has a $5,000 credit limit. The four accounts now have balances of $4,560, $4,600,$4,800 and $4,800. Mr. & Mrs. Mallrat are "tapped out". Their credit score is going to suck. They are going to scream that they have never had a late payment.

The fact is that Mr. & Mrs. Mallrat are "high risk". They may be perfectly honest and skillful users of credit but their practice is risky. There is almost no reason that anyone would retain such high credit usage if they had savings. With the least little problem they are going to get behind.

There was an interesting case on the Fair Isaac WWW site showing how folks intending to lower their credit score combined several credit cards into one line, canceled some cards and wound up with a score 20-30 points lower.

- Unless you pay cash, don't be a young couple with two new cars. I have gotten loan applications from young couples whose combined gross monthly income was $5,000 and whose car payments were $900. If you are going to do this make one of them a van so that you can live in it.

Credit Repair

A few years ago, when I turned on my cable TV guide there was one of two ads: the psychic hotline or 2 guys who look like rappers talking about credit repair. I would put these 2 groups in the same category. I wouldn't give either of them my money. If you know about your rights you can handle credit repair on your own. (I don't know about the psychic thing.)

First get a current copy of your credit report. Find the derogatory items. You want to get rid of them permanently. You may find an item that was "taken care of" when you last got a mortgage and you are wondering how it got back here. You must understand what is here, how it got there, and how to prevent it's getting there in the future. There are hundreds of companies that prepare these credit reports. There are a zillion entities that report items but (and here's what you can do something about) there are only 3 credit repositories. What you might want to do is dispute the inaccurate derogatory information.

As far as I can tell, there is only one way to do this. You must mail a registered letter to each of the repositories and dispute the items that you feel should not be on your credit report. Listen up: if you are not going to send registered mail, don't bother. Your disputing the derogatories places the onus of keeping them thereon the repositories. They must go back to the entity that provided the information and ask them to prove that it should be there. (This is one of those times that you are thinking: "thank the Lord for lawyers". Nice idea.) If they cannot establish within 30 days that it is valid it must come off.

Please understand something very clearly. I am not suggesting thatanyone abuse this. I am saying that you have rights and should usethem if you want inaccurate information taken off your credit report.

What Our Credit Reporting Agency Can Do

There are two services which the credit bureau that I presently use provide:

- if you have a derogatory credit item which should be removed and a letter from the creditot directing it to be removed we can have it removed and your credit score recalculated within three business days.
- "what if" scenarios.  We can run "what if" scenarios so that you can get a good estimate of, for example, how to allocate available cash tp pay down credit cards so as to maximize the benefit to your credit score.

The Drill

When a credit reporting agency receives a dispute, it must reinvestigate the disputed items within a "reasonable period oftime," unless it believes the dispute is "frivolous or irrelevant."

Here's how to do this:
1) get your friendly Realtor of mortgage broker to get a credit report with the data separated into the 3 credit repositories.
2) send a registered letter to each credit repository (addresses below) disputing the information which is inaccurate. You must make aclear statement that the accuracy or completeness of specific information is "disputed" or "challenged". Challenge each item individually.
3) if they do not reply within 30 days send them another certifiedletter stating that you have given them a reasonable amount of time and insist that the disputed items be permanently removed. In the US we have three credit reporting bureaus:
Experian (TRW), CBI (Equifax) and Trans Union.

If you want to dispute the contents of your credit report send them certified mail at these addresses:

P.O. Box 740256
Atlanta, GA 30374
(800) 685-1111

Experian (TRW)
P.O. Box 2105
Allen, TX 75013-9505
(800) 422-4879

Trans Union
1561 E. Orangethorpe Avenue
Fullerton, CA 92631-5207
(800) 858-8336
(316) 636-6100

Credit Repair Scams

There are numerous credit repair scams. In addition to the rap person TV there is a WWW site that shows you, in consecutive frames,how to obtain a "new credit identity" and how to build a cable descrambler box. Draw your own conclusions.

There are numerous on line sites that suggest a technique called credit file segregation. These sites ask you for $X and thensuggest that you apply for a new "Taxpayer ID number" or "EmployerID Number" and use that in lieu of your Social Security number tostart a new credit file. Do not do this.

There are a couple of problems with this. 1) it may be illegal and2) information in your credit file is not filed primarily by social security number. It is filed by name and address.

Getting It Together

Repairing incorrect damaging information on your credit reportis one thing. Getting control of credit usage is another. Some folks have so much credit usage, relative to their income, that they may be destined to become renters forever. If you are insuch a position it is necessary that you reduce your credit usage and dependence.

Credit cards charge such high rates that credit card debt can become as severe as drug dependence. Using credit cards asa convenience and paying the balances off every month is OK. Purchasing things that you cannot afford at present using creditcards that charge 19% interest is plain stupid.

If you do have exorbitant credit card debt and find that you cannot buy a home then you must work on reducing your debt before you start gathering a down payment.

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