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Past Articles [October 2002]
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Credit Scoring
If you are in the market to purchase a home one of the first things you will need to do is to become qualified for a loan through a lender. Most of us do not have the means to pay cash for a home.
In this article I will attempt to take the mystery out of “Credit Scoring” Fannie Mae and Freddie Mac several years ago began to track and explore risk factors on why a particular mortgage went bad and was foreclosed upon. Working with a credit reporting agency, now called Experian, a credit risk or credit score number was developed to measure the borrower’s credit standing and the likelihood of default or delinquent payments.
Thus the FICO was born. FICO is the generic name for credit scoring. If you have ever applied for a loan you know that your credit history is scored on a numeric scale. Many factors affect your credit score. Such factors are:
- Current delinquencies
- Outstanding collections or charge offs
- Length of credit history
- Public records
- High use of credit balances
- Number of accounts with balances
- Number of new accounts opened
- Installment vs. revolving
How have you paid your debts? How often have you paid your bills after they were due? How many consumer loans and open charge accounts do you have? What are the current balances on these accounts? How long have you had credit? Generally the longer you have had and have successfully managed credit, the higher your credit score. How many times have you authorized a lender to check your credit record? How many new accounts have been opened recently? What types of credit do you have in use? Do you have a mixture of types of credit, such as credit cards, personal loans etc?
So what is a good FICO score? Although one’s FICO score in NOT the only factor of whether a mortgage loan is finalized or not, nearly all lenders use FICO scores a part of the approval process.
FICO scores can range from 300 to 899. The higher the FICO score the better financial risk you are in the lender’s eyes and less concern a lender will be with other traditional factors such as housing and debt ratios.
700 and above: This is considered an excellent credit score, above 720 is called “Accept Plus” for automated underwriting.
680 to 700: This is considered very good
660 to 680: This is the standard automated approval score
620 to 660: This is a cautious risk score
600 to 620: Underwriter needs to carefully review mortgage application
Below 600: Extreme concern should be taken by underwriter to determine acceptable risk.
How do you stack up using this scoring system? Give yourself an honest assessment of your credit history and I suspect that your numbers will come in fairly close to your lender’.
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