Mortgage Credit Scoring.
Written by on Wednesday, December 21st, 2005 in General.
Mortgage credit scoring is a scientific method that uses statistical models to assess an individual’s credit worthiness based on his or her credit history and current credit accounts. Credit scoring was first developed in the 1950s, but has come into increasing use in the last two decades. In the mortgage industry, it evolved into widespread prominence in the mid-1990s.
In the decade before this, the three major credit bureaus, Experian, Equifax and TransUnion all worked with the Fair Isaac Corporation to develop scoring models that enable each bureau to offer a score based solely on the contents of that credit bureau’s data about an individual.
Creditors… especially those in the mortgage industry… frequently use the scores when deciding who receives loans. They can order your score, commonly called a FICO score, from each one of the three bureaus, but it only draws upon information from your credit report. Individual mortgage lenders will also consider other information, such as your salary, or how long you have been employed at the same company when making loan decisions.
FICO scores are computer-generated calculations which use information from an individual’s credit report, and include factors such as how much money is owed and whether payments have been made on time. That score is then compared to the credit performance of consumers with similar profiles. The scoring system awards points for each factor that helps predict who is most likely to repay a debt. The total number of points… or the FICO credit score… is then used to predict how likely it is an individual will repay a loan and make payments on time.
Each credit bureau has its own unique system for compiling credit scores. However, the scoring methods have been standardized to some extent, so a numerical score at one bureau is somehwat equivalent to the same numerical score at another. Thus, a score of 640 from Equifax indicates the same credit worthiness as a score of 640 from TransUnion or Experian, even though the calculations used to determine those scores are different at each bureau.
Because most individuals will have three different scores from each of the credit bureaus, it’s the universal and standard practice in the mortgage industry to view all three credit reports and accompanying scores through what’s called a tri-merged report. They then use the middle score of the three scores as the borrower’s qualifying score. This is why you may be asked about your knowledge of your midscore FICO. It’s this three digit number which determines whether you get approved for a mortgage and on what terms.
Credit scores range from 350 to 850 points, but those numbers can mean little on their own… except for the fact that the higher a credit score is, the more likely a borrower will be approved, and approved on preferred terms. However, credit scores become more meaningful and useful when they’re viewed within the context of a particular lender’s own cutoff points and underwriting guidelines.
What’s A Good FICO Score?
Under general mortgage lending guidelines, a score of 650 or above indicates a very good credit history. A score of 680 or better is usually viewed as excellent. People with these scores will usually find obtaining a mortgage quick and easy, and will have a good chance to get it on favorable, or what’s sometimes referred to as “preferred” terms.
Scores between 600 and 650 (average FICO scores fall into this range) indicate basically good credit, but also suggest to mortgage lenders that they might look at the potential borrower closer to assess any particular credit risks before extending a large loan or high credit limit. People with scores in this range have a good chance of obtaining a mortgage at a good rate, but may have to provide additional documentation and explanations to the lender before a large loan is approved. This means their loan closing may take longer, making their experience more like that of borrowers in the days before credit scoring, when every borrower was thoroughly researched as a unique individual.
A score below 620 may prevent a borrower from getting the best interest rates, but a good mortgage can still be obtained. In fact, in most cases, a borrower with a midscore FICO of just 580 can obtain a zero down, interest only mortgage… which has been, and continues to be, a very attractive and good loan for many mortgage borrowers.
Do something about bad credit.
If you’re hampered by credit scores in the mid 500s, you might give serious thought to stop fretting over what you can’t do because of bad credit, and focus on what you can do… and that’s improving or repairing your bad credit. In the long run, you’ll be far better off, and you’ll be glad you did. The laws which govern the credit reporting business make it possible to fix your own credit. A great Do-It-Yourself guide to raising your credit scores as quickly as possible is available by clicking here.