Credit Scores & Scoring
The Fair, Isaac (FICO) - Indicates the likelihood that a prospective borrower will default on his or her mortgage. The Scoring ranges from 300 to 900.
- Under 600 - Mostly likely will need to use programs that are not FICO driven - extreme concern for underwriting.
- 600-620 - Underwriter needs to carefully review application
- 620-660 - This is a cautious risk.
- 660-680 - This is standard automated approval score.
- 680-700 - This is considered very good.
- 700 - Is considered excellent.
- 720 & above - Is called "Accept Plus" for automated underwriting.
Mortgage brokers or lenders will frequently "run" a tri-merged credit report. What this means is that credit reports from the three principal credit bureaus (Experian, Equifax, and Trans Union) are combined. The scores by each of the bureaus are calculated independently by respective proprietary yet similar computer rating programs that are similar to the original Fair, Isaac (FICO) rating program. That is why the terminology FICO has become the generic way in which all the scores are referred to.
Each rating is based upon the credit information that each bureau has in its files. For example, a tri-merged report might indicate that the three scores received are 655, 665, & 675. Using the middle score would give one a score of 665 - in other words throwing out the high and the low. A credit score of 665 would in itself probably be acceptable (for a conventional loan) but not qualify one for the best rate on a loan. On the other hand, someone with a credit score of above 700 would probably qualify for the best rate. With regard to FHA and VA loans, credit scores are not the basis of being turned down for a loan but the same credit information, which is used to determine the credit scores, is used for determination of acceptability.
Much of the details of the rating process is held confidential but the score is broken down into five basic parts. The parts are weighted. Payment history is 35% of the score, outstanding debt is 30%, length of time credit has been established is 15%, number of inquires within the past year is 10%, and types of credit is 10%. See http://money.howstuffworks.com/credit-report2.htm.
- Payment is looking at how many bills have been paid late, numbers of accounts sent to collect, and any bankruptcies. The more recent a black mark the worse the effect on the score.
- Outstanding debt looks at how much is owed on car or home loans, how many credit cards you have and how close the cards are to their limits, all of which will affect the score. The greater the number of cards and the closer they are to the respective limits the lower the credit score will be. The rule of thumb is to keep card balances below 30% of their limits.
- The number of inquires in the past year will lower the credit score even if the cards have not been used or the loans not taken. The more recent an inquiry the worse the effect on the credit score it is.
- The types of credit are less well-defined but become more important if there is little other information. For example, for equivalent amounts of debt, numerous high interest rate finance company or credit card debts will be looked on less favorably than a single large long-term debt.
Although, credit scores are meant to be a simple number with which to determine acceptability there are some compensating factors which can help in getting a loan underwritten.
- Low long-term debt, particularly that which has been paid down over a long period of time.
- Ability to make a large down payment on the property.
- Minimal credit use.
- Excellent job history.
- Excellent payment history.
- Currently making rent or mortgage payments which are equal to or higher than new payment.
- Additional income potential - For example, just completed college or training which qualifies for higher income.
There is no simple method of improving one's credit score, particularly in the short term, but there are things that can help.
- Review your credit report and get any incorrect information corrected. This can take time so start the process in advance (preferably at least 6 months) of when you need the credit.
- Close any unneeded accounts.
- Reduce credit card balances below 75% of the credit line and preferably below 30%.
- Don't let anyone make an inquiry on your credit report unless it is absolutely necessary.
This explanation is meant to take some of the mystery out of the credit score process but it is not meant to be definitive. This information came from numerous sources including the Arizona Association of Realtors Graduate Realtor Institute training program. The information is thought to be correct but no guarantees are made. It is suggested that if it is really important or you are really interested in the subject that you do additional research on the matter. Also, I would appreciate your feedback on how useful you found this information and any suggestions on additional information which might be helpful.