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Question For All The Mortgage/Financial Experts

By Cheryl Johnson

Industry Observer

April 17, 2008 02:45 AM

Most of you know we handle some rental properties .... when a new prospective tenant applies, we run a credit report .... the credit report includes a FICO score. Okayfine. Just normal stuff....

But we are seeing a lot of FICO scores below 600! And I'd think a credit score in the 500s would indicate charge-offs and collection accounts, judgments, maybe a bankruptcy ... but NO.

The most recent applicant we reviewed had a FICO score of 548 ... NO collections, NO charge-offs, NO BK, NO judgements, NO mortgage lates, NO foreclosure. Just a whole bunch of maxed out credit cards, and some 60 day lates.

Here's the question: Has the FICO scoring system changed since the "credit crisis"??? It would seem to me that a score in the 500s is a pretty hard hit for nothing more than some ....ahhh... "indiscretion" in the use of plastic. :-)

Thoughts, anyone?

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Colleen Fischesser Northwest Property Shop

NextHome Experience - Chelan, WA

A Tradition of Trust in the Pacific NW since 1990!

Cheryl, I'm parking for comments. It truly seems as if anyone can ever decode the FICO process, they'll rake it in hand over fist!

Apr 17, 2008 03:01 AM

Anonymous

Jason Wade

I read an article that the the bureaus were changing the scoring to put more emphasis on recent credit versus old credit. You would think that would help things, but your example is shocking!

Apr 17, 2008 03:21 AM

Barbara S. Duncan

RE/MAX Advantage - Searcy, AR

GRI, e-PRO, Executive Broker, Searcy AR

This kinda points out what I've always thought. Having bad credit shouldn't be detrimental to renting. Bad credit people may not be able to buy so they have to rent....and stay a long time.

Apr 17, 2008 03:40 AM

Cheryl Johnson

Highland Park, CA

To give everyone a little more back-story. The applicant is a single woman, in her late 30s. She is a TV set designer, has never owned a home. Her late payments and maxed credit cards are all recent and are all a result of the writers strike that dragged on out here for so long.

She admits she should have started down-sizing sooner, but she just kept thinking things would get better soon, and kept using her credit cards to maintain the L.A. lifestyle. (A lesson for agents in our current market? :-) )

Renting a smaller apartment in NELA is part of the downsizing, and yes, we are renting to her regardless of the credit score.

But I keep looking at her credit report and that score and thinking ... Whoa .... the only bad stuff on her credit report are all the lates on credit cards.

Oh, and she says she tried to get another credit card recently and was turned down because of the low FICO. So I suppose the turn-down drags the score even lower.

Apr 17, 2008 04:26 AM

Ken Montville

RE/MAX United Real Estate - College Park, MD

The MD Suburbs of DC

I'm not a mortgage guy but my guess is that FICO has re-jiggered their algorithm to be even harsher than it was before so that the lenders and insurance companies and anyone else who uses the FICO score doesn't get burned because they relied on the score. I'm thinking they see lawsuits galore from entities that will say "FICO said they were good to go and the debtor walked out on their debt obligation leaving us holding the bag!! Bad FICO. Bad. Bad."

Everybody is soooo nervous nowadays. It just means people have to dig deeper into the whole story (like you did) to get a clearer picture of the individual. This may not be a bad thing.

Apr 17, 2008 05:41 AM

Irina Netchaev

Pasadena Views Real Estate Team, Inc. - Pasadena, CA

Pasadena CA Real Estate

Great question Cheryl. Just parking for comment here as well. This is the first I've seen this. Have a rental on the market, but didn't run FICO scores yet and have not encountered this. Very curious...

Apr 17, 2008 03:09 PM

Eleanor Thorne

Equity Resources - Cary, NC

Advantage Lending 919-649-5058

Cheryl - no "offical" word of FICO "rigging" has come out - but we are seeing lower scores in situations you are describing. The best "guess" as to the reason does lie in the credit crisis. Theoretically - the FICO (and the other scores) should be a changing target, since it is suppose to reflect what the last 90 days or so say about what your credit will do in the next 180 days (or so) AS COMPARED TO THE BEHAVIOR OF OTHER PEOPLE. As the American credit "histories" are changing (more folks going into foreclosure) then the models are being updated.

When faced with someone like you describe - they can benefit from opening an additional credit card or line of credit and move part of the balance to a new card. The key is getting the ratio of credit balance and available credit closer to a 50% ratio and PAYING BILLS ON TIME. I've been in this business for over 20 years... this is NOT about using me as a lender (obviously I'm a couple of miles away in NC)... but it's CRITICAL for agents to work with a lender who understands (rates, FHA, programs, the usual) AND how to counsel customers about credit. If I was an agent - I'd ask my loan officer what could be done to improve the score - if the answer is "rapid rescore" I'd probably open my eyes for a new LO. There's simply more to it - there are credit card companies that will lend to her... if she waits another 60 days. THE RATE WILL BE HIGH...

Apr 18, 2008 11:22 PM

ARDELL DellaLoggia

Better Properties Seattle - Kirkland, WA

It depends which way their housing cost is moving. If they are leaving a place that cost a lot more, then they are moving in the right direction. If by renting the place you are offering they are doubling their housing cost, and they had poor credit with the previous lower monthly housing expense, then the same score will be trouble waiting to happen.

Apr 20, 2008 04:09 AM

Ardell ... I hear you.

But mainly, I am just kinda wondering out loud if the FICO people have made some changes in how they compute scores. Looking at our gal's credit report , I would have expected maybe low 600s ... not mid 500s.

Has anyone pulled their own FICO recently? On one of those free credit report web sites or something? Was it about what you expected or was it lower?

Apr 20, 2008 04:22 AM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Cheryl..... yes, the emphasis is placed on the most recent credit. Especially anything in the last year. And high end balances, almost maxing out your high end credit. Or, if you go over your limit, this hurts even more. High credit and recent lates are the biggest culprits to a lower score.

I have a guy right now, that has a credit card with a high end credit balance of $24,500. He owes $23,200. His mid score is a 577 and we did an analysis and it said if he paid down $3,100, that his score would go up 21 points. Hope this helps some..

jeff belonger

May 31, 2008 08:00 PM

Monica Blanchard

CMG Financial - Cypress, TX

Jeff:

I am curious. WHich company do you run your credit analysis' through?

Jun 01, 2008 12:21 PM

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