Are thousands of American home buyers being charged more for their mortgages every year than they should because of credit information irregularities? That's a very hot question in the nation's capital right now.

Here's another: Have you checked out your own credit reports and scores recently to see whether conflicting, outdated or erroneous information may be pushing you into a higher interest rate category?

Welcome to one of the least understood and murkiest areas of the American home mortgage market: The connection between the mortgage rate quote you get from a lender and what is--or isn't--in your credit files and scores.

The biggest players in the market, beginning with Fannie Mae and Freddie Mac, all now "price" home loans according to projected credit risk, using risk-prediction software. The going market rate may be 6 percent for a 30-year loan , but if your credit files and and scores hint at past problems, you could be charged one or two percentage points or higher--even if your files are in fact wrong.

Say your name or Social Security number gets mixded up by banks with somebody else's--somebody who's credit history isn't spotless, like yours. Or let's say you are self-employed and you put your business's monthly expenses onto your VISA card. You always pay off the balance, month after month, without fail. But when your credit scores are pulled for your mortgage application, your balance outstanding happens to be close to your credit limit.

Whammo! Your credit score gets knocked down for any of these common, innocent situations. You may in fact be an excellent risk, deserving of creampuff fees and rates. But your credit score is depressed by 40 or 50 points when you apply for your home mortgage, and guess what?

You are quoted a higher rate than you deserve. If you apply online or through any of the thosuands of lenders and brokers who work with Fannie Mae or Freddie Mac, the odds are that you'll never know you were "priced up." That's because neither Fannie Mae nor Freddie Mac consider it their duty to inform borrowers of increases in rate quotes because of credit file issues.

And, in many cases, neither do the lenders or brokers who originate the loans. Federal officials say there is at least anecdotal evidence that mortgage lenders are not following the strict requirements of the federal Fair Credit Reporting Act to inform their customers whenever their loan request results in an "adverse" rate or terms--something less advantageous than the applicant would have qualified for absent the derogatory credit information.

Such situations represent "adverse actions" under the fair credit law and should be disclosed and explained to applicants.

"But I think that often does not happen," says one federal official familiar with the issue.

In a letter to the US Department of Housing and Urban Development, the country's main trade group representing independent credit reporting agencies, the National Credit Reporting Association, noted that substantial anomalies exist in credit reports and credit scoring that produce adverse decisions that mortgage applicants know nothing about.

If unseen, outdated information in credit files produces a depressed credit score that knocks an applicant into a "subprime" category, according to the group, the consumer could pay tens of thousands of dollar extra for no good reason.

A borrower on a $100,000 loan who's score gets depressed below some cutoff threshold set by a lender, Fannie Mae or Freddie Mac, the consumer could easily pay 2 1/4 percent or more on the interest rate than the best available rate. That, in turn, could amount to extra interest payments close to $60,000 over a 30-year term, says the group, which seeks more federal attention to credit file inaccuracies and scoring anomalies.

How can you avoid needless overcharges because of credit file irregularities? First and foremost, pull all three of your credit files directly from the repositories (Equifax, Experian, Trans Union) before applying for a new mortgage or refinance. Be aware that your files may vary in significant ways among the three because they contain reports from different creditors, collection agencies, etc. Be aware, too, that your scores among the repositories are likely top vary from highest to lowest by 40 points or more. Even variations of 80 to 100 points are not uncommon, according to credit agencies.

If you find outdated or incorrect information, get it corrected before you apply for a loan anywhere. It's a lot harder to "rescore" your file after a rejection or higher-priced quote than it is to correct problems in advance.

Published: November 18, 2002

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.