Honesty is the best policy for loan applicants


Some claimed they couldn't pay their bills because the dog chewed them. Some said the bills fell off the top of the refrigerator and couldn't be retrieved. Some faulted the U.S. mail for failing to deliver. And still others said that a passionate love affair kept their minds off their finances.

These are among the crazy explanations offered by prospective mortgage borrowers when confronted with flaws on their credit reports. Whether you're to blame or not, you'll undoubtedly have to straighten out the mess before you can get a new mortgage or refinance the old one.

"The bottom line in this whole thing is just to be honest. Peoplpanic and over-react when they're faced with negative credit information. What they should remember is that lenders want to make the loan just as much as the consumer wants to get it," said Sidney Lenz, executive vice president of Countrywide Funding Corp.

Fewer that 1 percent of home loan applicants are turned down because of problems on their credit reports, Ms. Lenz said. Even in this era of tighter credit standards, people who have made late payments for periods lasting as long as three to six months can obtain a mortgage if they can show a stable payment history before and after the incident occurred.

"We look for patterns," said Natalie Kuhn, Pikesville branch manager of Great Western Mortgage Corp. "Just because a customer had a problem for a few months doesn't mean they're not credit worthy."

Granted, you'll find it virtually impossible to obtain a mortgage if you don't have a job when you apply. But just because you've passed through a traumatic period of temporary joblessness, a difficult divorce or a medical emergency that set you back financially, that doesn't mean you can't redeem yourself in your lender's eyes.

"The most critical issue is the customer's attitude toward credit," Ms. Kuhn said. It's far better to have an overall good credit history with one rough patch of a few months than to show you've had a casual approach toward payments that spans several years, she said.

"Some of our customers think we live in a vacuum, but we live in the real world. We know things go wrong. That's OK as long as you show that you've shown a serious attitude toward making payments for many years," Ms. Kuhn said.

Even if your bill-paying practices have been impeccable, you might have to cope with an alleged "derogatory" or two when seeking a mortgage. Why? Because a large percentage of credit reports have errors -- often caused by the company that reports financial information. At least half of all credit reports contain mistakes, Ms. Kuhn estimated.

"Whether it's your fault or not, dealing with the credit problem can be a nightmare," she said.

Mortgage specialists offer these pointers:

* Don't offer lame excuses for late payments that are clearly your fault.

Many people shrug off late payments on the basis that they paid late fees. Others like to blame a husband or wife who does the family bookkeeping. Still others blame a secretary who handles their personal bills. The problem with all of these excuses: They deflect responsibility. And lenders look for responsibility more than any other trait.

When asked for a verbal or written explanation of a late payment or other credit problem, your best bet is to make an honest admission of what happened. Describe what you've done since then to correct the problem.

"Real life crises are fine. But we don't like hollow excuses. They rub loan processors the wrong way," Ms. Kuhn said.

* Don't assume you're to blame.

Some mistakes occur repeatedly due to shortcomings in the credit reporting system. One Anne Jones gets her car repossessed and another Anne Jones living in the same town gets the rap on her credit report. Often the credit information of parents and their grown offspring gets intermingled, especially when a young man is a junior. You may be told you have an open credit line on a store account that was closed long ago but never reported to the credit bureau.

"Student loans are a major nightmare for a lot of people," Ms. Kuhn said. Like other assets, such loans often change ownership several times. What you wind up with are credit report entries -- making one loan look like several loans, some of them delinquent.

* Try to avoid getting stuck on the issue of fairness.

You'll undoubtedly have to spend time and energy to justify the situation even though it's obvious you're not at fault. No matter who is to blame, underwriters in a lender's office must have some explanation to close a file. Simply refusing to cope with the problem could cost you a chance at the mortgage you want -- especially now that lenders are deluged with refinancing applications.

A Towson woman learned this lesson the hard way when she sought to refinance her two-story colonial. Her credit report claimed she was dead and that the Internal Revenue Service had an unsatisfied lien against her estate for past taxes. In fact, the lien had been placed on a piece of property owned by her late mother and the lien had been satisfied. Even so, the woman had to take two days off work to get the IRS to clear her name, Ms. Kuhn, her lender, recalled.

People get understandably irate when they suffer from the shortcomings of the credit reporting system.

But while you may choose to lobby legislators about long-term solutions, don't forget your short-term interest, said Ms. Lenz of Countrywide Funding. "Regardless of how unjust a credit problem may be, you need to take the time to get it solved or you may lose your bigger objective of getting your mortgage."

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