These FICO Myths are Killing Credit Scores!Daniel Dobbs2023-05-25T20:32:16-07:00
Every day, prospective buyers are making ill-informed credit decisions affecting their FICO scores; spurred on by media/credit gurus touting outdated advice.
It’s the misinformation they dispense which is damaging your buyer’s FICO scores & sabotaging future commission checks.
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Based on 40+ years in the loan biz., I’ve well versed in many “trial and error” methods the gurus are simply unaware of.
For the sake of brevity (I have no reason to educate other MLOs with my techniques), I’ll simply list bullet points illustrating the most common misconceptions.
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1) “Free” credit report scores reflect mortgage report scores. No. For the purposes of obtaining a mortgage; free credit reports are literally worthless.
2) Foreclosure sales damage scores worse than a short sale. NO. What affects credit scores are the number of “times” the borrower is late (30-60-90 days); more than the “event” itself.
2a) A borrower can go BK even though they have perfect credit. YES.
Revenge is a dish best served cold. I’ve had two clients who caught their spouse cheating– (but didn’t let on they knew about affair) then quietly proceeded to max. out all their joint credit cards-then proceeded to go bankrupt; all the while making minimum payments on the cards (maintaining the perfect payment history).
Both of the “injured”” spouses saw only a minimum decline in credit scores (approx. 35 points).
3) Every derogatory item hurts a credit score. No. Items more than 4 yrs. old do not affect your score.
California law deems unsecured debts over 4 years old are not collectible / enforceable.
But collection accounts are often “sold and resold” (creating a “rolling” effect) affecting credit scores long after the original debt has long since expired. Buyers who dispute a debt over 4 years old will cause the creditor to “refile” (update) the derogatory item and cause scores to drop!
4) Every collection account must be paid off to obtain a loan. No.
Do not pay off ANY collection/past due accounts before the COE; old derogs paid before COE will result in lower credit scores! know that’s counter-intuitive but it’s how the system is rigged. Whether an account needs to paid at COE, is at an underwriter’s discretion and will be disclosed when the loan is underwritten approved.
5) A divorce decree legally discharges a spouse from the responsibility for a debt that was incurred by both parties. NO! A divorce court can’t absolve either spouse form a joint debt.
6) When co-signing for a loan the highest scores are used to ” determine the borrower’s interest rate. NO! The lower of the two buyer scores (middle) determine the interest rate.
One other note: When qualifying for a mortgage a co-signers (usually parents) debts must be factored into the “debt-to-income calculations” (aka “DTI”) for the CURRENT transaction.
Often co-signers (“parents”) have also co-signed for other loans (for other children/grandchildren) and often this drives their debt ratios so high it kills the current transaction.
If it can be proved that the “other child ” is making payments from their own personal bank account – directly TO THE CREDITOR…then debt (of the other child) will not count in the DTI calculations against CO-SIGNER (parents).
If the “other child” is paying the co-signer (parents) DIRECTLY to the co-signer (parents), the payment does then count against the co-signers (parents) DTI.
7) Credit scores can be improved quickly if the loan applicant is added to another person’s account(s) with a superior credit score. TRUE But if one borrower misses payments, both borrower’s scores suffer.
8) Court judgments are “reported” for 7 yrs. The answer is mixed. Judgments are reported for 7 years to the credit bureaus BUT are valid for 10 years. Judgments can then be renewed for another 10 years (totaling 20) by refiling the judgment at the court where the original verdict was rendered by the prevailing party (winner).
Unpaid judgments (which fall of the credit report after the 7 years) MAY “morph” into an “abstract judgment” that will pop up on a preliminary title search of public records at the very last minute before COE.
9) Closing credit lines and accounts will raise credit scores. WRONG!!!! It’s just another misconception that’s killing transactions. Don’t close any accounts with a positive payment history!
10) Past debts (not listed) on a credit report, do not have to be paid before the close of escrow. The answer is mixed.
If a borrower HAS EVER defaulted on a government debt (state/federal/county), it will show up at the last moment just before loan docs are drawn. This includes: child support, student loans, unpaid county hospital bills etc.
If the borrower has funds to pay off this long-overdue debt (how likely is that?), this can be fixed easily. If not, the deal dies. At best, the escrow probably closes late.
11) You can have “too much credit”. No. Just keep balances as low as possible. Older “open” credit lines (even if not being used) contribute to higher FICO scores.
12) Borrowers should spread out their unpaid balances so that no card has more than a 1/3 balance on any given account. The answer is MIXED. Not every vendor (i.e. general Nordstrom’s) doesn’t report to all three bureaus. ERGO paying off an other account (that reports to ALL three bureaus) may boost a borrowers score to pay down one account vs paying off two other creditors scores
Every mortgage company has a credit simulator (algorithm) that will outline how to boost a borrowers score. Before the borrower begins engaging in the loan process: It is better to have all balances consolidated onto one credit line (at the lowest APR) than to have small balances spread out over different accounts. Underwriters may view the latter as credit abuse and it’s easy for a borrower to miss a payment if multiple billing cycles are being juggled.
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