Credit and Loan Knowledge Check

Types of Credit

• Traditional credit includes installment loans, revolving loans, and 30-day open agreements reported to credit reporting agencies
• Non-traditional credit includes rent, utility, child support, and other bill payments that are verified by lenders

Credit Reporting Agencies

• There are three major credit reporting agencies: Experian, Trans Union, and Equifax
• Consumers can request one free credit report from each agency per year, but must pay a fee for credit scores
• Errors on credit reports can be corrected by contacting the agency and providing proof of the errors

Credit Score Calculation

• Payment history accounts for 30% of the FICO score calculation
• FICO score is used by lenders to determine creditworthiness

Correcting Credit Errors

• Consumers have the right to correct errors on their credit report for free
• To correct errors, follow the instructions on the credit report and provide additional information as needed

Improving and Managing Credit

• Factors that affect credit scores include:
  • Payment history
  • Outstanding debt
  • Length of credit history
  • Types of credit used
• Open new credit wisely to improve credit scores

FICO Score Components

• FICO score is calculated based on:
  • Payment history
  • Amount of outstanding debt
  • Length of credit history
  • Types of credit used
  • New credit opened

Non-Traditional Credit Acceptance

• Some lenders accept non-traditional credit, including:
  • Rent payments
  • Utility payments
  • Child support payments
  • Other large recurring expenses

Ordering a Consumer Credit Report

• A credit report provides information on credit history and scores
• There are different types of credit reports, including:
  • Consumer credit report
  • In-file credit report
  • Residential mortgage credit report
• Consumers can request a consumer credit report from credit reporting agencies

Disputing Inaccurate Information

• Under the Fair Credit Reporting Act, consumers can dispute inaccurate information on their credit report
• Correcting errors on a credit report may change the credit score

Applying for a Mortgage Loan

• A mortgage loan application involves providing personal financial information and credit application
• Verification of information provided includes:
  • Income and employment
  • Assets
  • Down payment assistance
  • Credit
  • Debt

The Mortgage Payments and Other Costs of Homeownership

• The costs of homeownership include:
  • Principal
  • Interest
  • Taxes
  • Insurance
  • Private Mortgage Insurance
• Additional costs to consider:
  • Closing costs
  • Moving expenses
  • Reserve funds
  • Home maintenance
  • Home Owners Association Dues (HOA) if property is a condominium

Mortgage Options: Advantages & Disadvantages

• Adjustable Rate Loans:
  • Advantages:
    • Start with lower monthly rate
    • Fully amortize except for Payment Option ARM
    • Periodic and life interest rate caps limit the amount the interest rate can increase
  • Disadvantages:
    • Payment Option ARMS may not fully amortize
    • Monthly principal and interest payments vary
    • Adjusted rate may be higher and not affordable
    • Payment shock
    • Potential negative amortization

Typical Add-on Fees

• Fees associated with mortgage loans:
  • Reduced documentation: 0.750% = 3/4%
  • Loan-to-value 90.01-95%: 0.500% = 1/2%
  • FICO score 660-679: 0.250% = 1/4%
  • Credit score higher than 740: -0.125% = -1/8%
  • Two-unit properties: 0.375% = 3/8%
  • High rise condominium or cooperative apartment: 0.750% = 3/4%