FICO Rules, but Other Options Remain
Sunday, October 1, 2006
If you have been looking for a mortgage, you know that your credit score is key to opening that next front door.
The higher your score, the less you pay to buy big-ticket items such as houses or cars on credit. For example, on a $300,000 30-year, fixed-rate mortgage, borrowers with scores of 760 to 850, the highest range possible, pay $470 less a month than those with a score in the 580 to 619 range.
Much lower than that, many lenders say, and you will pay a huge premium if you can get credit at all from traditional sources.
Other lenders say the magic numbers are 600 and 720 -- anything below 600 is too risky while anything above 720 gets the best of the best interest rates.
Fair Isaac Corp., the company that came up with the mathematical system behind the most widely used score, FICO, doesn't label the ranges.
But lending experts say they get their signals from Fannie Mae and Freddie Mac, who buy mortgage loans on the secondary market. For years, their guidance to lenders was to be cautious with borrowers who score below 620. Now there is no absolute number in their guidance because Fannie and Freddie have automated underwriting programs that predict risk in other ways.
For borrowers in the low 600s, however, the secondary mortgage buyers tell lenders to look at other parts of the loan application for offsetting factors, such as a big down payment.
The FICO score is drawn from data collected by the three national credit bureaus. But FICO isn't the only number that matters in getting a mortgage loan. The three credit bureaus -- Experian, TransUnion and Equifax -- also produce separate scores based on information they get from creditors, which can vary from bureau to bureau.
Here are some more basics:
· Score s : Credit scores come from information kept by reporting agencies on how well you pay the bills that are reported to them, how much credit you have and how long you have had that credit. Mathematical models are used to turn the data into a number.
Paying bills on time is critical: It counts for 35 percent of a FICO score.