Credit scores are the cornerstone of most mortgage loan approvals. And while many loan originators prefer to service borrowers whose credit scores qualify them for a conforming loan, a good deal of applicants with nonconforming credit can immediately increase their scores by using rescoring services.
A consumer's credit profile can contain inaccurate or outdated derogatory items -- such as collections, judgments, high balances -- that have been satisfied but not reflected on the files of the "Big 3" national credit repositories. Missing updates can result in lower than deserved credit scores.
But dismissing these potential borrowers can result in a loss of production. Some credit reporting agencies that say their rescoring tools and solutions can erase errors on credit files and increase scores by hundreds of points.
David McGovern of creditrescoring.com claims he has rescored over 1000 credit files. In a written statement, he said about 70% of credit files contain errors -- 29% serious enough to derail a credit decision. Furthermore, 85% of all lending decisions factor in a credit score to determine what interest rate a consumer will be charged, according to the Web site.
But when a loan is pending, brokers can help more borrowers qualify for a loan and better terms, and at the same time boost their business, by using rapid rescoring services offered by authorized credit reporting agencies. The services can expedite correction on consumer credit files at each of the repositories almost overnight once specific documentation proving the errors is submitted to them.
However, deciphering which borrowers are good candidates for rescoring can be a tricky process, as sometimes corrections can result in lower scores, Tom Conwell, the president of Credit Technologies Inc. told MortgageDaily.com. For this reason, through its rescoring service, the Michigan-based credit reporting agency provides brokers with a complimentary analysis of the credit report to determine if it has potential to be rescored up to the lender's expectations. If the potential is there, the service can have files updated within the same day to 72 hours after the documentation is submitted to the national repositories.
Conwell pointed out that his company has made over six million credit transactions since its founding in 1990, and the company also pioneered credit rescoring in 1997. The average score increase the credit files the company rescores is 30.2 points. The record increase -- 237 points -- happened to a man who had a merged credit report in an Experian file. The individual happened to have a similar name as another family member.
While low credit scores tend to be associated to consumers with nonconforming credit, even high-income homeowners who have never been delinquent on any of their accounts can have their credit score severely affected for a variety of reasons, Conwell added. Anything from having a name similar as another person to the number and types of open credit lines, loan balances and the age of credit lines can trigger a low score outcome.
Conwell said that another "very slick" tool Credit Technologies provides brokers with is a two-component software solution; the first component analyzes a credit file and checks whether there are dollars available to improve the relationship between the balance and the credit limit. Paying off an account, paying it down, and even establishing a new account can help raise a credit score. The automated analysis provides brokers with step-by-step recipe to generate the most positive score change based upon the amount of dollars that are available.
The second component is the What-if Simulator, which does thousands of calculations in real time to let lenders know exactly by how much a credit score can improve if a certain derogatory or incorrect item is removed from a credit file, according to Conwell.
"Credit scores were initially described as being an additional aid in underwriting a loan," Conwell said. But what has happened is they have become a "no-go tool;" most of the automated underwriting programs all have some target scores, and if a consumer's score is higher, its approved, and if not -- it can be turned down. The executive said that in many cases, lenders aren't reading the entire report but looking at the score and the decision's made purely based upon the score.
Credit Technologies' two-component system "could be somewhat deceiving being that they have developed their own credit score model that is not the same model as what the 3 credit bureaus use," said Standfacts Credit Services sales representative and spokeswoman Tracy Barber. "Therefore not predicting a correct credit score and charging the clients."
California-based Standfacts also educates and consults with clients prior to rescoring a borrower so they too can determine what borrowers make the most sense to rescore. Standfacts said that approximately 80% of all files that undergo its update scoring process have the scores increased by at least 10 points and their highest raise ever was 157 points.
Standfacts claims one of its marketing and information tools helps brokers and lenders close more loans. The tool is a client-customized e-mail that links to its Web site, Barber said. She noted the letter is customized to look like it comes directly from the lender, it thanks prospective borrowers for their application, and explains that they have low credit scores with some derogatory items.
The e-mail is sent to consumers who score lower than the broker's target, and it is distributed seconds after the credit report is run, Barber said. Standfacts said brokers can provide the service to their borrowers -- creating additional contact with prospects and helping them to stand out among the other brokers. Barber noted that their Web site is informative for borrowers and sometimes provides answers to questions that the broker didn't know.
"A lot of times a broker might not analyze a credit report with a low score and maybe focus on a person's report that has a higher score, therefore overlooking the borrower with the lower score who might legitimately have errors on their report," Barber said in an e-mailed statement. "We have seen it a hundred times."
Consumers can logon to Standfacts' site with their given credit report number and view their credit scores, reason codes and the derogatory items on the credit report that are causing the low score, Barber added. The site is designed to answer commonly asked questions, and educates the borrower on the documentation they will need to make corrections to any errors found on their report.
Consequently, the service helps brokers maximize their time, volume and efficiency, Barber said. It allows them to concentrate on higher-score consumers, while at the same time prompting low score borrowers to start gathering the documentation needed to possibly increase their score.
"There are just myriad rules that go into how the algorithms themselves work," Credit Technologies Conwell said. But, "if there's anything on the file that the consumer believes is incorrect, whether its derogatory or not, there's a significant opportunity there or chance that by getting it corrected it will have an effect on the score."
Some basic items a broker can detect to determine if a credit report has potential for being rescored include something in the file that is s incorrect, something missing or that does not belong to that particular consumer, high balances, and too many credit card accounts as these are generally less favorable than mortgage or an installment accounts. Even too many inquiries can be the cause of a lower score, especially credit card inquiries because every single inquiry counts, as opposed to mortgage inquiries in a thirty day period counting as one as well as with car loan inquiries in a 14 day period. Because the terms and even the access to home loans depend significantly on a consumer's credit scores, brokers often automatically discard consumers that score lower than the target score they're willing to deal with.