Littleton RE Trends: Credit Scoring

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What is a FICO score?

FICO stands for Fair Isaac Corporation, a company that created the most used credit scoring model in the United States.  An individual’s credit score is calculated through a statistical algorithm and is used as a factor in determining the likelihood of a borrower defaulting on a loan.  FICO scores are generally used for obtaining mortgages, car loans or consumer credit.  The scores are provided from the three major credit reporting agencies: Equifax, Experian and Transunion.  Typically, there is a variance amongst the scores since each agency has a slightly different scoring formula.  FICO scores range from 300 – 850, with higher scores being considered less risky.  For mortgage lending purposes, any score over a 680 is considered good and above a 750 is considered excellent.  Any score below 580 is considered great risk and will be challenging for such a borrower to secure financing. 

The factors that contribute to a FICO score and the weighted percentages for each are as follows:

  • 35% — timeliness of payments (adverse dings to scores for any payment greater than 30 days later, collections, past due accounts)
  • 30% — the ratio of used debt to allowable debt for consumer credit (an individual that maxes out their credit cards will see a decrease in their score)
  • 15% — length of credit history (the more credit history and showing proof of consistent timely payment, the better the score)
  • 10% — types of credit used  (installment, revolving, mortgage)
  • 10% — recent credit inquiries and recent new credit (taking out a fair amount of new credit with multiple credit inquires can adversely impact a score)


How does your FICO score impact your interest rate on your loan?


Low credit scores are deemed greater risk for lenders since the likelihood for defaulting on the loan increases.  As such, lower FICO scores translate into higher interest rates.  Mortgage lenders will group credit scores in a range, usually in 20 or 40 point increments, with interest rates progressively getting better for each higher interval.  For example, a borrower with a middle credit score between 660 – 680 will have a higher interest rate (presuming all other variables being equal) compared to one with a 680 – 700 score.  Typically, when a borrower has a 750+ credit, they will be able to secure the best possible rate, assuming their income, assets, collateral and down payment are acceptable.


For qualifying, underwriters use the middle credit score pulled from the three bureaus versus an average of the three.  For instance, a borrower with scores of 702, 717 and 749 would have a 717 FICO compared to an average score of 722.  If there is more than one borrower on the loan, the lender will use the lowest middle score of all borrowers versus the middle score of the primary wage earner, like many lenders used to do.  Often times, a husband and wife will have drastically different scores.  When that occurs, it is best to qualify off of only the person with the good credit.  However, if a spouse or partner is left off of the loan (they can still go on title though), none of their income or assets can be used to help qualify.  Therefore, the sole qualifying person must have ample liquid assets, as well as gross monthly income to stay below the lender’s allowable debt-to-income ratio. 


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