Questions and Answers
Which of the following is considered a non-traditional credit payment by lenders?
What is a consumer credit report primarily used for?
According to the Fair Credit Reporting Act, what can a consumer do if there are errors in their credit report?
Which type of credit report is specifically tailored for residential mortgages?
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How may credit scores be affected after correcting errors in a credit report?
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What is the disadvantage of Payment Option ARMs?
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What is the price in points for a loan-to-value ratio of 90.01-95%?
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What is the price in points for a borrower with a FICO score between 660-679?
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What is the advantage of an Adjustable Rate Loan (ARM)?
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What is the price in points for a high-rise condominium or cooperative apartment?
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Study Notes
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
- Advantages:
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%
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Description
Test your understanding of traditional and non-traditional credit reporting, including installment loans and revolving loans. Learn about credit scoring and responsible borrowing practices.