CREDIT SCORING . . . HERE TO STAY!
The Fair, Isaac Credit Bureau Scores, known as FICO Scoring, was introduced
to mortgage lending nearly a decade ago. The past credit history of a borrower is
examined to determine the likelihood of timely future payments on a new
mortgage.
We've always known that a few late payments did not make a borrower a high
credit risk. On the contrary, the trick has been to develop a method by which
we could identify a borrower's likelihood of paying their mortgage on time.
This scoring not only assesses how likely a borrower is to pay back a loan, but
also measures the degree of risk a borrower represents to the lender. Scores range from 300 to 900 (depending upon the repository
reporting), the higher score indicating better credit quality.
In measuring the relationship between credit scores and default records,
lenders have learned that there are many more dimensions to credit than just
reviewing and explaining a late payment record.
There are 33 "variables", grouped into five categories, gathered
for a borrower's credit profile. Some of the items include: 1. Previous
Credit Performance: Examining late payments, judgments, collections, etc.
and how recently they occurred. 2. Current Level of Debt: Number of outstanding
account balances vs the credit limit. 3. Pursuit
of New Credit: Review of the number of inquiries made by creditors &
new accounts opened during the past year. 4. The Time Credit Has Been Used:
Examination of how old the accounts are. 5. Types of Credit in Use: Are
the accounts bank, gas, entertainment, department store credit cards, personal
loans, auto or installment loans? Installment debt and
low balances on bankcards result in the higher scores In other words, we no
longer merely look at "good" vs
"bad" credit as a means to determine the likelihood of making future
mortgage payments.
Most Recent indications of the “weight” given to scoring goes
like this:
1.
Late Payment History 35%
2. Current Level of Debt 30%
3. Pursuit of New Credit 10%
4. Length of Credit 15%
5. Type of Credit 10%
Here is one way in which you might “interpret”
the above information:
- Pay on
time, all the time
- Don’t
exceed 50% of any revolving credit line
- Keep
some revolving accounts open.
Most lenders look for a minimum of 4 credit lines available,
especially if you must seek some form of niche loan. Today’s
practice of constantly transferring account balances to lower interest
rate bearing cards, while a good business decision, could result in
lowering a score.
- Avoid
finance company credit. Use banks and credit cards.
- Don’t
apply for credit unless you need it.
Inquiries during the past twelve months are reviewed and can impact
a score. Two exceptions . . .
mortgage and auto inquiries within a 30 day period of each other count as
one inquiry.
Should a consumer be denied a loan due to a low score, clues as to why might
be found by reviewing the four "most significant reasons" for the low
score as provided by the credit provider. These are generally the four most important
factors that affected the score and kept it from being higher.
In spite of wide spread skepticism regarding the impact that this process
might have on acquiring loan approvals, lending sources indicated that this
scoring system has proven to be an objective and reliable method of qualifying
potential home buyers. Controversy continues, however, around the issues of the
type of credit information used to develop the scores and how to change
erroneous information contained in a borrower's credit file.
Some skepticism remains especially as more home loans approved via the
system are now facing foreclosure difficulties. To be fair, the default
problems are more a condition of lending sources having relied upon high credit
scores in approving loans while ignoring what are proving to be some very bad
loan options.
There has emerged a major benefit via the credit scoring process . . .
automated underwriting. These automated systems allow for speedier approvals,
fewer approval "conditions" and often approves loan requests that
more typical underwriting procedures would have had to decline. For instance,
the investors/agencies prohibited an underwriter from approving any loan
request in which any aspect (i.e.; qualifying ratios, required cash investment,
required reserves, short employment period, etc.) differed significantly from
their published loan standards. The automated systems, on the other hand, seem
more flexible in their approval guidelines. The result is more loan approvals
for what used to be termed "marginal" buyers. With the loan default
problems emerging it will be interesting to see if the automated systems become
less flexible.
While scores above 660, up until recently, required minimum credit review
and were often approved with minimum "conditions", this has changed. 680
has become the current basic score anything less generally requires a more
comprehensive review of the borrower's credit and ability to meet loan
standards. Scores below 620 are now generally not acceptable except for
government approved loan options (FHA, VA, Guaranteed Rurul Housing). On the conventional side, a score below
640 will likely require a more "cautious" review and could result in
the borrower having to accept a less desirable rate and terms and, in some
cases, being denied their loan request.
A few arbitrary minimum scores have been identified for certain types of
financing. For instance, many non-owner occupied
purchase options with an LTV exceeding 70% often requires a minimum 680 credit
score. The few remaining 100% loan programs require a 700 minimum credit score.
On the other hand, FHA and VA, while they "look at" the scores, do
not determine the borrower's approval predicated on scores alone. This, of
course, could change in the future as credit scoring continues its popularity
among investor sources that ultimately purchase the loans.
Lower scoring borrowers had, up until recently, been required to seek
"niche" loan products when their credit scores were insufficient to
qualify for the more competitive loan options. The result often was a higher
interest rate and terms via the sub-prime loan market. Those options are
virtually closed for now. But,the system is under constant
review to determine the revisions necessary to determine the credit worthiness
of the lower scoring applicant. In other words, they recognize that all low
scoring applicants are not necessarily bad risks for home loans. Via
refinement, the system continues to try to better identify those "good"
borrowers, in spite of what might be considered a low score. We anticipate and
welcome more information soon.
Lenders, for a long time, had been
prohibited from providing consumers with their credit score information.
Consumers and lenders alike protested this prohibition and we are now allowed
to provide you with a copy of a credit report obtained in the process of
acquiring a loan. Each of the three credit repositories have web sites at which borrowers can obtain credit
information. When applying for a home loan, the lender requires a report
from all three repositories. Acquiring the reports individually will not
only cost more money (at approximately $8.50 a report vs. a $14-$18 cost for a
three merged report, which in most cases will be acquired free from most
lenders) but are not usable by your
eventual lending source. Humboldt Home loans will obtain a credit report
during your loan process at no fee to the borrower. You may find it useful to
"get an idea" regarding what your credit looks like by accessing one
of the repositories? The equifax site is recommended
as the most user friendly by many, but here are all
three sites.
www.econsumer.equifax.com
www.transunion.com
www.experian.com
While Fair Isaac continues to
"suggest" that consumers will not understand their report, the above
sites at least now exist. The sites can confuse the issue a bit by providing
scores that differ from the typical mortgage three merged report. The good news
is that they do attempt to provide information regarding how to interpret
the scores. Consumers can also contact Fair Isaac at their website of www.fairissac.com for general credit score
information. For the consumer interested in
"behind the scenes information” www.myfico.com
may be interesting as it attempts to explain various aspects of credit reports
and credit scoring.
While still learning how far we can "push" this computerized
system, given today’s more inflexible approval process, automated
underwriting is revolutionized the lending industry. Its flexibility and
quickness in approving loans likely far outweighs any current negatives with
the program. Thus, credit scoring is here to stay. It makes sense that
prospective borrowers become pre-approved for a loan, which will include the
examination of the borrower's FICO scores to assure their ability to acquire
their desired loan.
THE FOLLOWING IS GOOD ADVICE IN
TODAY'S WORLD OF CREDIT SCORING!
1. Close
"inactive" credit card accounts.
2. Always be cautious of giving your Social
Security Number and other personal information to prevent premature credit
"inquiries". (Such as when 'shopping' for a car, or other large
purchases.)
3. Reduce
the number of credit cards held to a minimum. It may no longer be prudent to
retain too many credit cards (with too much "available" credit).
Retain only those cards typically used.
On the other hand, it may be a good idea to maintain a minimum number of
“credit lines” available.
Many niche type lenders require a minimum of four credit lines available
if a borrower is to be considered for non typical financing.
4. If
an unsolicited credit card is mailed to you (that you did not apply for, nor
want to use), do not reply in any way.
Destroy the card and do not use it, not even one time. Our understanding
is that no “inquiry” is noted on your credit report as a result of
these unsolicited mailings.
Webpage/credit scoring