Rules Encourage Rate Shopping

By LEW SICHELMAN

Oct. 4, 1998 12 AM PT

SPECIAL TO THE TIMES

WASHINGTON —

Home buyers are no longer being penalized for searching long and hard for the best mortgage rate and terms.

Now, thanks to a group of lenders who worked to persuade the three credit bureaus to change their method of rating mortgage applicants, you can scout around for the best deals until you are satisfied you can’t do any better.

“This is huge,” says Ginny Ferguson, a Pleasanton, Calif., mortgage professional who led the assault as chairman of the National Assn. of Mortgage Brokers’ Credit Scoring Task Force. “No longer will consumers be forced to pay up to a half a percentage point higher rate because they shopped around.”

Until recently, if a home buyer didn’t confine his mortgage hunt to an all-too-brief seven-day period, every consumer-generated inquiry counted against him when his credit file was scored electronically by each of the three repositories--Equifax, TransUnion and Experian (formally TRW).

If you were offered credit--say a pre-approved credit card, for example--the inquiry made by the bank or merchant into your credit history was not counted against you because it was unsolicited. But if you applied for any type of credit, including a mortgage or auto loan, it counted as an inquiry.

And depending on other variables, applying for a loan with more than one lender--to see if you qualified for the lowest rate--often proved costly.

While the credit agencies say that multiple inquiries account for less than 5% of the predictive power of their scoring models, each inquiry that wasn’t received within seven days after the first one reduced an applicant’s credit score anywhere from two to 50 basis points. (A basis point is 1/100 of 1%).

60 Days to Browse

Applications for auto or home loans received within a seven-day period counted only as one inquiry. But the National Assn. of Mortgage Brokers has succeeded in convincing the repositories to count all multiple inquiries by car dealers and mortgage companies made in a 14-day period as only a single inquiry.

In addition, a “30-day buffer” has been put in place for such inquiries. According to Ferguson, that means that only inquiries older than 30 days before the day your credit file is rated by the credit agency will affect your score. All other mortgage applications will be reflected--so the lender will know you are looking around--but they won’t be counted.

Consequently, you now can browse for almost 60 days--plenty of time for most would-be borrowers to shop the market--and be charged with only three inquiries. And that’s not enough to materially affect your credit score one way or another.

Furthermore, mortgage applicants will no longer be the victims of the loan-delivery system. And that too is “critical,” says Ferguson.

In the past, whenever a lender submitted a loan package with a full credit report, the repository would run an additional in-house credit report as part of its own quality-control program. And that report counted as another inquiry that could trim the applicant’s credit score by as many as 30 basis points.

“Suddenly,” says Ferguson, “borrowers were no longer qualifying for the rates and points they were promised, and mortgage brokers had to go back and requalify them. But it wasn’t another credit inquiry, it was the same request.”

The brokers association has persuaded the repositories not to count their own inquiries against consumers. And as a result of this and the other changes, you can now pretty much look around to your heart’s content to make sure you obtain the best pricing.

But only for a mortgage, warns Ferguson, who “cannot stress enough” that seeking out credit other than for a house or automobile “tells the system you are in the hunt.”

Applying for more credit from multiple providers is known as “credit surfing.” And if you surf at the same time you are trying to obtain financing for a house, especially if you’ve reached the limits on your other accounts, your credit score will suffer.

“Ten inquiries for a credit card indicates you are looking for new credit,” says Ferguson. “Throw a mortgage into the mix and it could plunge an over-encumbered consumer into a bad situation.”

Credit Scores Can Vary

Another mistake people make is to transfer a big balance from an expensive high interest-rate account to another with a lower rate. Though this is sound money management, if you make the switch at the same time you are applying for a mortgage and the first account holder hasn’t reported that you’ve paid off what you owe, the credit report could show two large balances instead of one.

No matter what you do to improve your credit score, it’s a good idea to order credit reports from each of the three repositories.

Each bureau uses a different scoring technique. That alone means your score won’t be the same at each one. And since the various trade lines report to one or two bureaus but rarely to all three, your score could vary up to “a couple hundred points” from one to another, according to Ferguson.

“The fact that three models rank differently does not mean that one or all are wrong,” says the broker. “The objective is to rank order by risk on the information on file in the individual repository.”

If you order only one report, you’ll have to use the score contained therein. If you order two, you’ll have to use the lower score when applying for a mortgage. But if you obtain three, you can use the middle score.

Of course, accuracy of the information contained in each credit file is essential. So look for errors and omissions. But pay particular attention to the most recent items, which count against you the most.

Under amendments made last year to the Fair Credit Reporting Act, the credit bureaus must now begin investigating a written complaint within five days of receiving notification of a possible error. And if they haven’t received a reply back from the merchant involved within 30 days, the disputed item must be dropped from the report.

Within five days after completing the investigation, moreover, the credit bureau must send you a written report with its findings. So, in effect, you can now get your credit file corrected--and obtain a new credit score--no later than 35 days after you start the process.

That’s much better than the 75 to 90 days it used to take.

But there is a proper way to initiate the process. For one thing, you must do so in writing.

For another, keep your dispute letter to a single page, and dispute only one item per page. If you disagree with more than one item, submit multiple letters. Attach copies of supporting documentation and send your correspondence “return receipt requested,” so that you and the credit bureau know exactly when the clock starts ticking.

Distributed by the United Feature Syndicate.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

The Credit Bureaus Here are the addresses and phone numbers of the three credit bureaus:

Equifax Information Service

P.O. Box 740256

Atlanta, GA 30339

(800) 685-1111

(770) 375-3150 (fax)

Experian

Attn: NCAC

P.O. Box 2106

Allen, TX 75002