I have several web sites that allow readers to submit
questions about mortgage guidelines and loan options. I
received this question from Donald in Toledo, OH., Sunday
morning.
"What would happen if someone else used my social security
number for a utility bill and I never lived at that
address? This happened about five years ago when I found
out about it. Will this hurt the underwriting of the house
I am trying to buy"?
During our conversations it turned out that this "utility
bill" turned into a collection. Fortunately it was five
years old. I also learned that his credit scores are: 615,
625, and 652.
Answer:
The first thing you want to do when you find out something
like this is dispute it with all the credit bureaus:
Equifax, Trans Union, and Experian. This process is much
easier than it use to be years ago thanks to the Internet.
Each of these company's have a web site full of information
you should understand about your credit, credit scores, and
how to improve them. You can file your dispute on line
from their web site.
The Government mandated a few years ago that every person
be entitled to one free credit report each year, ...from
each bureau. This is a wonderful thing because years ago
you were not allowed to even look at your report. You were
really up that well known creek and just guess who had the
paddles. Get your report once a year from each company and
take the time to review it. There is only one web site you
can get these reports from and that is
annualcreditreport.com.
If your credit scores are high enough this 5 year old,
small collection should not prevent a loan from being
approved. Since most underwriting is now performed on an
automated system you may be required to provide an
explanation and supportive documentation or you may even be
required to pay the collection.
In this particular case the credit scores are not really
bad but they are not really good either. In fact, they are
a little low compared to the average. This is a great
example as to why you should monitor your credit every
year. Don't wait till you are applying for a loan.
I don't have a clue what Donald's employment history is or
what his debt to income ratio is or how much he is putting
down. These factors all play a part in loan approval and
could be considered compensating factors if all three are
very strong.
However, knowing what I do know, my recommendation would be
that a conventional loan with a high loan to value (small
down payment) would be difficult and the interest rate, if
it were approved, would reflect the low scores. I would
recommend an FHA loan. The interest rates are excellent
and require only a small down payment. Again, this is
assuming the other factors are in line.
FHA mortgages are wonderful. They are very forgiving about
credit, require a low down payment, and they have some of
the best rates on the market. I might add one thing here
about the interest rate. At this point in time the par
rate is equal to or lower than a conventional loan
(depending on the lender) so if the company you are working
with is charging you a much higher rate they may be taking
advantage of your situation thinking you don't know any
better. Please, shop interest rates.
Fannie Mae has just announced additional pricing tiers
based on credit scores and loan to values. This pricing is
effective June 1, 2008.
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Connie Sanders owns several web sites where she teaches
mortgage guidelines and receives questions from consumers
and mortgage professionals. Visit her site today at
http://www.mortgageunderwriters.com
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