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Facts about Credit Scores...
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Credit scoring was developed to assist wholesale lenders with "pooling" mortgages together for resale to investors. As a by-product of that effort, credit scoring has helped millions of people become homeowners, where they would not have been able to using traditional underwriting guidelines. The credit score is a number computed from the information found in your credit reports. The credit report data is put through the computations of a scoring model. The criteria that makes up a model is proprietary to each of the three national credit bureaus; Equifax, Experian (formerly TRW), and Trans Union. These credit bureaus are competitors and do not share information with each other. Neither do creditors report information about you to all three.
There are three main scoring models which were jointly developed with California based Fair, Isaac and Company, Inc., a well known scoring model company. Fair, Isaac and Company, Inc. has been compiling credit bureau information into scores since 1988. Scores range from 400 (not good) to 900 (excellent), indicating creditworthiness. Each of the credit bureaus has a different brand name for Fair, Isaac's FICO(R) scores model. Equifax calls their model Beacon(R); Experian has the Experian/Fair, Isaac Risk Model; and Trans Union is Empirica(R). Any other score is not a FICO(R) score. Fair, Isaac, myFICO, and FICO are trademarks or registered trademarks of Fair, Isaac and Company, Inc. Fair, Isaac and Company, Inc's. credit models are proprietary.
FICO(R) scores are broken down into five main areas:
- 35% of the score is derived from account payment history.
- 30% is representative of your total amount of indebtedness.
- 15% is generated from the age of your accounts. The older the better.
- 10% looks at new credit and applications for credit.
- 10% analyzes the mix of different types of accounts (i.e., credit cards, car loans, mortgages, etc.).
Ocassionally, wholesale mortgage lenders, and/or their credit reporting companies, use credit reporting software containing out-of-date credit scoring models. This obsolescence results in borrowers, and their brokers, being confronted with lower credit scores and higher risk credit profiles from the lender's underwriting department, than the ones submitted to the lender in the borrower's original loan package. Corrective action would be to request the lender use the score from the credit report supplied with the original loan package, as allowed by Fannie Mae and Freddie Mac, when the score on the lender-pulled credit report is lower, without significant differences in the borrower's account information.
It is also worth pointing out that the borrower should cease, as much as is practical, all financial activity during the time period between the mortgage application and the mortgage loan closing, plus an additional three days for refinances, so as not to risk downgrading the credit score prior to closing. For example, avoid changing jobs; avoid financing a new car, boat, or RV; avoid paying off debts; and avoid shifting money around. The lender could re-price, or even withdraw, the loan if the score drops dramatically!
Mortgage lenders generally require credit reports and FICO(R) scores from two of the three national credit repositories; either as "In-File" reports, single or merged, or a Residential Mortgage Credit Report (RMCR) from a consumer reporting agency. Some lenders use the middle score, others average the two highest scores, and so on. Mortgage lenders are looking for a FICO(R) score of 620 - 680 for conventional Fannie Mae/Freddie Mac conforming loans. Borrowers with scores above 680 may qualify for better rates, loan programs and features, and faster closings, depending on the lender and loan program. However, for scores below the 620 cutoff, borrowers enter into the private "subprime" market, where rates increase as scores decrease.
These are the approximate corresponding mortgage credit ratings, which do vary by lender: "A+" is above 680, "A -" is 620 to 680, "B" is 580 to 620, "C" is 550 to 580, "D" is 520 to 550, and "E" is below 520. To give you some generalized insight into where you might be, 800+ puts you in the top 10% of the U.S. population, below 575 puts you in the bottom 10%, and 710 places you right about in the middle.
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Informed borrowers know the SCORE...
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