Even though credit scores play a key role in whether or not a person can be approved for a mortgage loan, the Consumer Financial Protection Bureau (CFPB) released a report revealing only one in five people actually obtain a copy of their credit report each year.
In addition, these overlooked reports that are important in the lending process could also contain errors that go unchallenged. In a recent report, the CFPB advised, ""The most effective way for consumers to identify errors in their reports is to obtain copies and review them.""
According to the CFPB, each year, about 44 million consumers obtain a copy of their credit report, yet estimates show the largest crediting reporting agencies-Experian, TransUnion, and Equifax--each maintain files on about 200 million Americans.
In 2011, consumers reached out to credit reporting companies about 8 million times to challenge information on their report, according to the CFPB. Overall, the actions led to 32 to 38 million disputed items.
When consumers did dispute information on their credit report, the CFPB found that nearly 40 percent of the disputes dealt with debt in collections, which is five times more likely to be disputed by consumers than mortgage information.
The CFPB acknowledged that ""some of this may have to do with consumers' incentive to dispute any negative information on their reports.""
Nonetheless, information provided by the collections or debt buying industry is much more likely to be questioned by a consumer.
When complaints about credit information are handled, the CFPB reported 85 percent are forwarded to the furnishers who originally provided the information, while the remaining 15 percent are resolved by the credit reporting companies. The CFPB also found that ""the documentation consumers mail in to support their cases may not be getting passed on to the data furnishers for them to properly investigate and report back to the credit reporting company.""
In prepared remarks, Richard Cordray, CFPB's director, noted the important role of credit reports for consumers.
""Credit reports on a consumer's financial history and behavior can determine eligibility for credit cards, car loans, and home mortgage loans Ã¢â‚¬" and they often affect how much a consumer is going to pay for that loan. The industry is critical in our economy. Without credit reporting, many consumers would likely be unable to get credit,"" he stated.
As for obtaining a mortgage, Ellie Mae's most recent origination insight report, which represents 20 percent of all U.S. mortgage originations, found the average FICO score for a closed loan in October was 750, while the average denied loan had a score of 706.
While requirements from the Federal Housing Authority (FHA) may be more lax, a report from DBRS stated the average score for an FHA closed loan was 700 and the average denied application had a score of 670.
A loan savings calculator provided by myFICO, the consumer division of FICO, showed how credit scores can impact the interest rate one would receive on a mortgage. As of December 14, 2012, a person with an average FICO score of 760-850 would receive a 2.975 percent rate on a 30-year fixed rate mortgage. However, if one had a score of 620-639, the rate would be 4.564 percent.
For borrowers who have obtained a mortgage but experienced a foreclosure or a charge-off, the CFPB reported a consumer with a FICO score of 780 would see points drop by 140 to 160. For a borrower with a score of 680, the drop in points would be 95 to 115.