FICO Scores and Your Mortgage
Three years ago, credit scoring had little to do with mortgage lending . When
reviewing the credit worthiness of a borrower, an underwriter would make a
subjective decision based on past payment history.
Then things changed.
Lenders studied the relationship between credit scores and mortgage
delinquencies. There was a definite relationship. Almost half of those borrowers
with FICO scores below 550 became ninety days delinquent at least once during
their mortgage. On the other hand, only two out of every 10,000 borrowers with
FICO scores above eight hundred became delinquent.
So lenders began to take a closer look at FICO scores and this is what they
found out. The chart below shows the likelihood of a ninety day delinquency for
specific FICO scores.
FICO Score Odds of a Delinquent Account
============ ============================
595 2 to 1
600 4 to 1
615 9 to 1
630 18 to 1
645 36 to 1
660 72 to 1
680 144 to 1
780 576 to 1
If you were lending a couple hundred thousand dollars, who would you want to
lend it to?
FICO Scores, What Affects Them, How Lenders Look At Them
Imagine a busy lending office and a loan officer has just ordered a credit report.
He hears the whir of the laser printer and he knows the pages of the credit report
are going to start spitting out in just a second. There is a moment of tension in
the air. He watches the pages stack up in the collection tray, but he waits to pick
them up until all of the pages are finished printing. He waits because FICO
scores are located at the end of the report. Previously, he would have probably
picked them up as they came off. A FICO above 700 will evoke a smile, then a
grin, perhaps a shout and a "victory" style arm pump in the air. A score below 600
will definitely result in a frown, a furrowed brow, and concern.
FICO stands for Fair Isaac & Company, and credit scores are reported by each of
the three major credit bureaus: TRW (Experian), Equifax, and Trans-Union. The
score does not come up exactly the same on each bureau because each bureau
places a slightly different emphasis on different items. Scores range from 365 to
840.
Some of the things that affect your FICO scores:
Delinquencies
Too many accounts opened within the last twelve months
Short credit history
Balances on revolving credit are near the maximum limits
Public records, such as tax liens, judgments, or
bankruptcies
No recent credit card balances
Too many recent credit inquiries
Too few revolving accounts
Too many revolving accounts
Sounds confusing, doesn't it?
The credit score is actually calculated using a "scorecard" where you receive
points for certain things. Creditors and lenders who view your credit report do not
get to see the scorecard, so they do not know exactly how your score was
calculated. They just see the final scores.
Basic guidelines on how to view the FICO scores vary a little from lender to
lender. Usually, a score above 680 will require a very basic review of the entire
loan package. Scores between 640 and 680 require more thorough
underwriting. Once a score gets below 640, an underwriter will look at a loan
application with a more cautious approach. Many lenders will not even consider
a loan with a FICO score below 600, some as high as 620.
FICO Scores and Interest Rates
Credit scores can affect more than whether your loan gets approved or not. They
can also affect how much you pay for your loan, too. Some lenders establish a
"base price" and will reduce the points on a loan if the credit score is above a
certain level. For example, one major national lender reduces the cost of a loan
by a quarter point if the FICO score is greater than 725. If it is between 700 and
724, they will reduce the cost by one-eighth of a point. A point is equal to one
percent of the loan amount.
There are other lenders who do it in reverse. They establish their base price, but
instead of reducing the cost for good FICO scores, they "add on" costs for lower
FICO scores. The results from either method would work out to be approximately
the same interest rate. It is just that the second way "looks" better when you are
quoting interest rates on a rate sheet or in an advertisement.
--FICO Scores and Mortgage Underwriting Decisions --
FICO Scores as Guidelines
FICO scores are only "guidelines" and factors other than FICO scores affect
underwriting decisions. Some examples of compensating factors that will make
an underwriter more lenient toward lower FICO scores can be a larger down
payment, low debt-to-income ratios, an excellent history of saving money, and
others. There also may be a reasonable explanation for items on the credit
history which negatively impact your credit score.
They Don't Always Make Sense
Even so, sometimes credit scores do not seem to make any sense at all. One
borrower with a completely flawless credit history had a FICO score below 600.
One borrower with a foreclosure on her credit report had a FICO above 780.
Portfolio & Sub-Prime Lenders
Finally, there are a few "portfolio" lenders who do not even look at credit scoring,
at least on their portfolio loans. A portfolio lender is usually a savings & loan
institution who originates some adjustable rate mortgages that they intend to
keep in their own portfolio instead of selling them in the secondary mortgage
market. They may look at home loans differently. Some concentrate on the value
of the home. Some may concentrate more on the savings history of the borrower.
There are also "sub-prime" lenders, or "B & C paper" lenders, who will provide a
home loan, but at a higher interest rate and cost.
Running Credit Reports
One thing to remember when you are shopping for a home loan is that you
should not let numerous mortgage lenders run credit reports on you. Wait until
you have a reasonable expectation that they are the lender you are going to use
to obtain your home loan. Not only will you have to explain any credit inquiries in
the last ninety days, but numerous inquiries will lower your FICO score by a
small amount. This may not matter if your FICO is 780, but it would matter to you
if it is 642.
Don't Buy A Car Just Before Looking for a Home!
In conclusion, a word of advice not directly related to FICO scores. When people
begin to think about the possibility of buying a home, they often think about
buying other big ticket items, such as cars. Quite often when someone asks a
lender to pre-qualify them for a home loan there is a brand new car payment on
the credit report. Often, they would have qualified in their anticipated price range
except that the new car payment has raised their debt-to-income ratio, lowering
their maximum purchase price. Sometimes they have bought the car so recently
that the new loan doesn't even show up on the credit report yet, but with six to
eight credit inquiries from car dealers and automobile finance companies it is
kind of obvious. Almost every time you sit down in a car dealership, it generates
two inquiries into your credit.
Credit History is Important
Nowadays, credit scores are important if you want to get the best interest rate
available. Protect your FICO score. Do not open new revolving accounts
needlessly. Do not fill out credit applications needlessly. Do not keep your credit
cards nearly maxed out. Make sure you do use your credit occasionally. Always
make sure every creditor has their payment in their office no later than 29 days
past due.
And never ever be more than thirty days late on your mortgage. Ever.
reviewing the credit worthiness of a borrower, an underwriter would make a
subjective decision based on past payment history.
Then things changed.
Lenders studied the relationship between credit scores and mortgage
delinquencies. There was a definite relationship. Almost half of those borrowers
with FICO scores below 550 became ninety days delinquent at least once during
their mortgage. On the other hand, only two out of every 10,000 borrowers with
FICO scores above eight hundred became delinquent.
So lenders began to take a closer look at FICO scores and this is what they
found out. The chart below shows the likelihood of a ninety day delinquency for
specific FICO scores.
FICO Score Odds of a Delinquent Account
============ ============================
595 2 to 1
600 4 to 1
615 9 to 1
630 18 to 1
645 36 to 1
660 72 to 1
680 144 to 1
780 576 to 1
If you were lending a couple hundred thousand dollars, who would you want to
lend it to?
FICO Scores, What Affects Them, How Lenders Look At Them
Imagine a busy lending office and a loan officer has just ordered a credit report.
He hears the whir of the laser printer and he knows the pages of the credit report
are going to start spitting out in just a second. There is a moment of tension in
the air. He watches the pages stack up in the collection tray, but he waits to pick
them up until all of the pages are finished printing. He waits because FICO
scores are located at the end of the report. Previously, he would have probably
picked them up as they came off. A FICO above 700 will evoke a smile, then a
grin, perhaps a shout and a "victory" style arm pump in the air. A score below 600
will definitely result in a frown, a furrowed brow, and concern.
FICO stands for Fair Isaac & Company, and credit scores are reported by each of
the three major credit bureaus: TRW (Experian), Equifax, and Trans-Union. The
score does not come up exactly the same on each bureau because each bureau
places a slightly different emphasis on different items. Scores range from 365 to
840.
Some of the things that affect your FICO scores:
Delinquencies
Too many accounts opened within the last twelve months
Short credit history
Balances on revolving credit are near the maximum limits
Public records, such as tax liens, judgments, or
bankruptcies
No recent credit card balances
Too many recent credit inquiries
Too few revolving accounts
Too many revolving accounts
Sounds confusing, doesn't it?
The credit score is actually calculated using a "scorecard" where you receive
points for certain things. Creditors and lenders who view your credit report do not
get to see the scorecard, so they do not know exactly how your score was
calculated. They just see the final scores.
Basic guidelines on how to view the FICO scores vary a little from lender to
lender. Usually, a score above 680 will require a very basic review of the entire
loan package. Scores between 640 and 680 require more thorough
underwriting. Once a score gets below 640, an underwriter will look at a loan
application with a more cautious approach. Many lenders will not even consider
a loan with a FICO score below 600, some as high as 620.
FICO Scores and Interest Rates
Credit scores can affect more than whether your loan gets approved or not. They
can also affect how much you pay for your loan, too. Some lenders establish a
"base price" and will reduce the points on a loan if the credit score is above a
certain level. For example, one major national lender reduces the cost of a loan
by a quarter point if the FICO score is greater than 725. If it is between 700 and
724, they will reduce the cost by one-eighth of a point. A point is equal to one
percent of the loan amount.
There are other lenders who do it in reverse. They establish their base price, but
instead of reducing the cost for good FICO scores, they "add on" costs for lower
FICO scores. The results from either method would work out to be approximately
the same interest rate. It is just that the second way "looks" better when you are
quoting interest rates on a rate sheet or in an advertisement.
--FICO Scores and Mortgage Underwriting Decisions --
FICO Scores as Guidelines
FICO scores are only "guidelines" and factors other than FICO scores affect
underwriting decisions. Some examples of compensating factors that will make
an underwriter more lenient toward lower FICO scores can be a larger down
payment, low debt-to-income ratios, an excellent history of saving money, and
others. There also may be a reasonable explanation for items on the credit
history which negatively impact your credit score.
They Don't Always Make Sense
Even so, sometimes credit scores do not seem to make any sense at all. One
borrower with a completely flawless credit history had a FICO score below 600.
One borrower with a foreclosure on her credit report had a FICO above 780.
Portfolio & Sub-Prime Lenders
Finally, there are a few "portfolio" lenders who do not even look at credit scoring,
at least on their portfolio loans. A portfolio lender is usually a savings & loan
institution who originates some adjustable rate mortgages that they intend to
keep in their own portfolio instead of selling them in the secondary mortgage
market. They may look at home loans differently. Some concentrate on the value
of the home. Some may concentrate more on the savings history of the borrower.
There are also "sub-prime" lenders, or "B & C paper" lenders, who will provide a
home loan, but at a higher interest rate and cost.
Running Credit Reports
One thing to remember when you are shopping for a home loan is that you
should not let numerous mortgage lenders run credit reports on you. Wait until
you have a reasonable expectation that they are the lender you are going to use
to obtain your home loan. Not only will you have to explain any credit inquiries in
the last ninety days, but numerous inquiries will lower your FICO score by a
small amount. This may not matter if your FICO is 780, but it would matter to you
if it is 642.
Don't Buy A Car Just Before Looking for a Home!
In conclusion, a word of advice not directly related to FICO scores. When people
begin to think about the possibility of buying a home, they often think about
buying other big ticket items, such as cars. Quite often when someone asks a
lender to pre-qualify them for a home loan there is a brand new car payment on
the credit report. Often, they would have qualified in their anticipated price range
except that the new car payment has raised their debt-to-income ratio, lowering
their maximum purchase price. Sometimes they have bought the car so recently
that the new loan doesn't even show up on the credit report yet, but with six to
eight credit inquiries from car dealers and automobile finance companies it is
kind of obvious. Almost every time you sit down in a car dealership, it generates
two inquiries into your credit.
Credit History is Important
Nowadays, credit scores are important if you want to get the best interest rate
available. Protect your FICO score. Do not open new revolving accounts
needlessly. Do not fill out credit applications needlessly. Do not keep your credit
cards nearly maxed out. Make sure you do use your credit occasionally. Always
make sure every creditor has their payment in their office no later than 29 days
past due.
And never ever be more than thirty days late on your mortgage. Ever.
Still have questions? Contact me today for a free
consultation!
consultation!
Colin O’Neal
Buyer’s Agent
200 North Rufe Snow Drive, Ste.102
Keller, TX 76248
(817) 898-0145 Office
(817) 898-1771 Fax
colin@househuntersdfw.com
Buyer’s Agent
200 North Rufe Snow Drive, Ste.102
Keller, TX 76248
(817) 898-0145 Office
(817) 898-1771 Fax
colin@househuntersdfw.com
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