Low credit scores mean high PMI rates
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Federal law stipulates that if a lender denies you a loan or offers you a higher rate or higher premium due to your credit score, that lender must provide you with an adverse action notice citing your credit as a factor in the underwriting decision. Smiljanich has brought a number of lawsuits against PMI companies that didn't provide the adverse action notice.

"However, since we first started filing these lawsuits in 2003 we're now noticing that most PMI companies are providing the adverse action notice," he says.

With the 60- to 90-day time frames common in terms of how long the lending and underwriting process takes from initial approval to closing, some consumer advocates wonder why consumers are getting hit with last-minute PMI rate hikes at closing.

"It's very difficult when the hike in PMI comes at the settlement table," says Evan Hendricks, author of "Credit Scores & Credit Reports: How The System Really Works, What You Can Do." "It's their dream of owning their own home. They are all set, the moving vans are packed, the old house is sold and they've moved or are moving out. How can they back out at this point?"

The reasons for the delay can vary.

"The PMI rate offer could change if someone locks in a mortgage loan and during the 60- to 90-day escrow period that consumer has a valid change to their credit situation," says Lakshminarayanan Srinivasan, product manager director at Fair Isaac, creator of the FICO Score. "Also, it's possible that the mortgage broker or consumer might have misrepresented their credit to the mortgage insurer or they misunderstood how their credit can affect PMI."

Rosenthal notes that most lenders use MGIC's automated underwriting engine, meaning that they are aware of the premium at the outset. However, if a consumer comes in with a lower income or credit score or a higher loan-to-value ratio, the premium would most likely end up being higher than originally quoted, she says.

What you can do
So how do you avoid being blindsided by a PMI rate hike at closing? There are a number of steps you can take to become aware of your FICO score and how it will affect your loan's interest rate, PMI and other mortgage terms.

Monitor your FICO score A step-by-step look at how to stay on top of your credit rating, avoid mistakes, check for errors and fix problems as they arise.

7 important actions 1. Request copies of credit reports. 2. Review reports for errors. 3. Work on correcting errors. 4. What if you can't get the error corrected? 5. Buy your credit scores. 6. Understand factors that affect credit scores. 7. Fix problems.

1. Request copies of your credit reports.
Pull all three of your credit bureau reports and your credit scores immediately. The big three credit bureaus are TransUnion, Experian and Equifax. You can obtain a free copy once a year of each of those reports. Read "Free credit reports available to all" to learn how. If you go through the bureaus directly or through Fair Isaac, you'll pay a fee.

2. Review your reports for errors.
Once you've gotten all three reports, review them for accuracy. This can be a chore, because the reports aren't particularly consumer friendly, but it's important because even one error on one report can lower your score by 20, 40 or even 100 points. Consult "How to read and understand your credit report." And since the bureaus collect information from different sources, an error that is on one might not appear on another, which is why you need to see all three reports.

3. Work on correcting errors.
Each credit bureau has its own system for error reporting, so the first step is to use the automated systems on their sites to report an error. They are obligated by law to check with the lender or entity that is the source of the error and find out if it is indeed an error or if the lender stands by the information provided.

4. What if you can't get the error corrected?
A growing specialty in the legal field involves helping consumers fix errors by suing the credit reporting bureaus. John Amorison, an attorney in Woodbury, N.J., deals regularly with consumers who are forced to pay thousands of dollars a year in inflated interest rate costs due to uncorrected mistakes on their credit reports. "The law allows for attorney's fees, so I can go to the bureaus and point out the mistakes with the documents we've gathered and show them what it would cost to go to court," he says. "In many cases, they settle and fix the error."

5. Buy your credit scores.
Once you've made sure your report is accurate or you've gotten any errors corrected, it's time to buy your credit score. Contrary to offers on the Web and late-night TV, there is no free ride when it comes to credit scoring. Many sites that advertise "free" credit scores aren't providing you with the actual FICO score that mortgage lenders and PMI companies will use to underwrite your loan. You can get scores at the credit bureaus or buy a package at myfico.com that contains all three credit scores.

6. Understanding the factors that affect your credit score.
The factors that affect your credit score are fairly obvious, such as your track record of making loan payments and how long you've had credit -- but many consumers aren't familiar with the details. See "What is a credit score?" for more information.

7. Fix problems.
If you've got an overdue balance that shows up on your report, repay it. In some cases, it can make sense to pay down some of your credit card balances or to close accounts that you aren't using, but there is no one-size-fits-all advice for improving your credit score. Read "Tips for boosting your credit score" for other ways to increase your score.

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-- Posted: Oct. 19, 2006