Credit Scores
For several decades, lenders have focused on developing scoring models to accurately analyze a borrower’s credit history and current status. The assignment of a number value to various aspects of that profile and a totaling of those values allows lenders to arrive at an overall credit “score.”
The numerical score range is 375 to 900 points. The scores are available through three national credit data repositories: Equifax, Trans Union, Experian scores. The names of the scoring programs for each credit bureaus appears in parenthesis.
Equifax (Beacon)
Trans Union (Empirica)
Experian (Experian/Fair Issac)
All three models are referred to as “FICO”.
Examples
For the FICO score, every borrower starts at 850. An amount is then subtracted for each “risk” item in a credit profile. This results in a number by which we can compare borrowers to each other and to delinquency and foreclosure records.
Borrower starts with a score of 850.
1 x 30 late on a VISA card could have a value of – 40
A two year old, Chapter 7 Bankruptcy could have a value of -200
A mortgage foreclosure could be valued at -250
6 new credit inquiries in the past 90 days could be worth – 50
Totaled and subtracted from 850, these values result in a score of 390.
This extreme over-simplification is what the Fair Isaac Company has done in developing their FICO scoring model.
How do mortgage lenders use FICO scores?
They use them as a guide to determine which loan programs their clients qualify for.
FHA/VA Loans:
Scores must be 600 or greater.
Conventional Loans:
Due to contract negotiations with Fannie Mae (FHMA) and Freddie Mac (FHLMC), loans with credit scores below 700 where the loan to value (LTV) is greater than 90.01% can no longer be approved. Additionally, bankruptcies, foreclosures and deeds in lieu (due to financial mismanagement) can no longer be approved with credit scores below 660, regardless of age. All loans with credit scores below 620 (660 with bankruptcy, foreclosure or deed in lieu) require a second level review. These new guidelines became effective with loan applications taken on or after May 15, 1997. There are no exceptions, regardless of the strengths of the collateral or capacity components of the loan.
Under no circumstances will a loan be denied or rejected based solely on credit scores. If a low credit score is a factor in a loan denial or rejection the underlying reason behind the credit score will be the basis of the decision.
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