A Your Credit Score
By mortgage writer: Dave Leonhart

In todays mortgage world most loans are granted or evaluated on a number of factors such as:
 
  Your income vs. your expenses (which is called a debt ratio)
   
 

Your home’s value vs. the total amount of loans against your home (which is called
LTV or Loan to Value)
     
 


Your credit rating or score (often called FICO score which is an acronym for Fair Isaac
Company http://www.fairisaac.com/fairisaac, which created the most popular credit scoring model in use today)
 

So what is this FICO score anyway you ask, and how does it affect me? Well, let me give you a brief summary.

First of all, this scoring system has been around for decades, although its use has picked up over the last ten years or so due to automated loan evaluation techniques, the computer and a need to have a more efficient and consistent loan evaluation process; hence, the scoring system for credit was born.

How does Scoring work?

Scoring is the term used to mean the automated evaluation of your credit report in its entirety. By using sophisticated statistical & analytical modeling techniques that Fair Isaac has learned from looking at credit histories over the years to determine what consumers are likely to be at more risk than someone else. They assign points to each variable they use in evaluating a credit profile, and thus add the total points to arrive a final score.

The actual method used by Fair Isaac is proprietary and a closely held secret “formula” you might say. You could think of it sort of like Coke-a-Cola’s secret recipe for manufacturing their world famous soft drink.

Of course the problem with this secrecy is that no one really understands how it is calculated exactly! Over time, we learn by experience and also the company produces guidelines which help us understand their thinking process, but essentially, it’s a guessing game.

Here’s what we (I) do know about it.

Scores
  Credit scores range from 300 to 850.
     
  The average American falls into the range between 600 & 750
     
 

Scores above 620+ are considered (Prime) consumers and will be granted the
best interest rates available
     
 

Scores below 620 are considered sub-prime and can still borrow money at many lenders,
but will pay a higher interest rate. The lower the score, the higher the rate
     
  Scores below 500 cannot usually find a mortgage loan anywhere
     
 


Scores above 700 can usually get preferred lending arrangements such as, limited or no documentation loans; little or no down payment loans; credit lines, etc, all at the best
interest rates available
     
    What affects your score
     
  Late payments. The more recent the more it will affect your score.
     
 

Total outstanding debt vs. your total credit line. In other words, if you’re maxed out on all your cards, even though you pay on time every month, you’re still considered a higher risk candidate
     
 



But here’s the reverse problem— If you have a lot of un-used credit cards/lines etc. that could be racked up quickly, this is also considered a higher risk. Basically, they’re looking for a balance between having some credit that is paid on time, but not excessive in any way. (I know, don’t ask me how much that is)
     
  The length of your entire credit history
   
    Tips to improve your score
     
 

Pay your bills on time… always. Even though Fair Isaac doesn’t distinguish between credit card late(s) and mortgage late(s), but lenders do! So make sure you always pay your mortgage on time.
     
  Don’t have too much open credit lines
     
  Don’t have all your credit lines maxed out
     
 
Keep the few credit lines you have open for as long as possible to increase your overall history
     
 
Don’t go around and open a lot of credit cards/lines at once. More is not better in this situation
     
  Bank credit cards are viewed more favorably, than finance company cards

The weird and crazy credit scores

Those of us in the mortgage business for any length of time, have all seen the crazy credit scores that seem to make no sense at all. Someone with lousy credit getting a fairly high score… someone with excellent credit having an average score… someone’s score changing wildly in days or even hours! One minute you’re qualified to get a loan, by the time funding rolls around, they no longer qualify due to a sudden decrease in the credit score.

Yes, these are the horror stories that fill our lunch rooms with gossip; helpless to do anything about it… but to hope and pray.

My advice is to follow the above advice as much as possible and just don’t concern yourself about it too much. Once a year run your credit report to assure things are being reported accurately, and immediately respond to the credit bureaus if you find something that’s not supposed to be there.

And if you do have a big problem on your credit file such as a bankruptcy, don’t worry, you still can get a loan, but you’ll just pay a little more for it. In a couple of years if you continue to pay everything on time, you find your score right up there near the top again.