CREDIT SCORES EXPLAINED

Lenders want to give you a mortgage, but they also want to minimize their own risk. The easiest way to reduse risk is by using your credit scores to make lending decisions.

Credit scores are compiled separately by three consumer reporting agencies -- Equifax, Experian, and Trans Union. These credit reporting bureaus calculate scores differently, and base their scores on information that may differ from other bureaus.

Equifax Beacon 5.0 Facta: scores range from 334 to 818.

Experian Fair Isaac V2: scores range from 320 to 844.

Trans Union FICO Risk score Classic 04: scores range from 309 to 839.

Your credit score is a number that reflects the information in your credit report, whether you pay your bills on time, how much you owe creditors, payoffs, and derogatory information such as liens. It also includes inquiries into your accounts from lenders, landlords, and employers.

When you apply for a home loan, your application includes giving your lender permission to "pull your credit" and base the decision to lend to you and the rate of interest on the information contained in your credit scores. The higher the score, the better terms you'll receive from the lender.

Burney Ashley of Guaranteed Rate
Teaching About Credit At A Seminar

Once your credit scores are reviewed by your mortgage lender, you'll receive a computer-generated report of the findings in the mail, but it won't have a copy of your entire credit report. It may include key factors that adversely affected your scores. Some examples might include:

• Too many inquiries in the last 12 months
• Time since most recent account opening is too short
• Proportion of loan balances to loan amounts is too high
• Too many accounts with balances
• Amount owed on revolving accounts is too high
• What if you're declined for the loan, or your lender wants to charge higher interest than you were expecting? Is there anything you can do?

Yes, talk to your lender and ask for help repairing or correcting your scores. For example, you may have innocently done something that resulted in a negative score, such as closing a line of credit. Or, you may not have realized that a late payment would bring your score down as much as it has. The lender will tell you exactly what you need to do.

Under federal law, you have the right to obtain a free copy of your credit report from each of the national consumer credit reporting agencies once a year. There are several sites where you can go to get your free reports includingAnnualCreditReport.com or FreeCreditReport.com.

If you find an error such as derogatory data that doesn't belong to you, or an account that shows the wrong balance, simply show the lender your canceled check, release of lien or other proof that the credit report is wrong.

You'll also have to correct the information yourself separately with each agency, and it may take a few weeks for the agencies to record the updated information.

In the meantime, work with your lender and do what he/she tells you to do to get the best rate, including paying more than the minimums, paying on time, and making sure that your debt to income is well within your ability to repay all your loans.

HOME SELLERS: THE CURSE OF THE FIRST OFFER

Sometimes when everything goes right we have trouble accepting that fact. Perhaps nowhere is this phenomenon more clearly illustrated than in the case where a seller receives a good offer right away.

There are so many stories of sellers who refused to take a good, but not perfect, first offer, and who then waited a long, long time before finally accepting something else at a considerably lower price. And most agents who have been around for a while know to shudder when a good strong offer is made almost at the outset of a listing; for the seller's reservations are almost inevitable. "Did we list it too low?" "If someone will offer this much so soon, maybe we should wait a while and see if we can get more." Etc.

When we read in the news of homes in some areas selling well above list price, and when we've just recently come through a period when multiple-offer situations were commonplace, it is understandable that such thoughts come to mind. Nonetheless, they are generally unfounded, especially if the market is anywhere near "normal", as ours is today.

As an antidote to the ill effects of the "curse of the first offer", a couple of observations might be kept in mind.

First, the fact that an offer is received early in the listing period -- even in the first few days -- doesn't mean that the property has been listed too low.

It is easy to overlook how very efficient the residential real estate marketplace has become. Modern multiple listing systems (MLS) provide agents, and thus their buyer clients, with virtually instant access to information about existing inventory and about what has newly come on the market. In the old, old days a buyer's agent did not become aware of new listings until "the book" (i.e. the compilation of MLS listings) was published. There might have been a lag time of ten days or more from the time the listing was taken.

Today, a good buyer's agent will have electronically entered a "profile" of his client's needs and price range into the system. Then, whenever he logs on to the MLS, he will be notified if a listing has been entered that matches that profile. In a low-inventory market such as we have had recently, buyers' agents will log on a half-dozen times a day, or more, to see if an appropriate new listing has been entered. Moreover, in most systems the buyer's agent is able to place the buyer himself on a similar notification.

The point is that potential buyers learn quickly of the existence of an appropriate new listing. Thus a flurry of activity at the outset of the listing does not necessarily imply a too-low price; rather, it reflects the efficiency of the system.

Secondly, an early first offer does not imply that the seller should hold out for full price.

We all know that there is typically a bit of a dance in the pricing and negotiating for a property. Sellers, with the concurrence of their agents, will usually list their property for an amount that is both higher than what they believe its value to be and higher than what they would be satisfied to receive. Why? Because they know that buyers almost always want and expect to pay less than the listed price

However, when an otherwise acceptable offer comes in near the outset of a listing period, sellers are frequently tempted to hold out for full price, or much closer to it than would normally be expected. Caution should be exercised in this regard.

For one thing, as we have noted, exposure of the property to buyers occurs pretty quickly nowadays, and sellers shouldn't assume that there are going to be more, much less higher, offers as the listing period progresses.

Secondly, there often can be a transactional benefit to "leaving something on the table." A real estate transaction is a process. These days, with inspections and disclosures, there are almost always "second negotiations" during the course of escrow. A buyer who feels ground down in the purchase negotiation may well be more difficult to deal with as other issues arise.