Credit Scoring & Grading

 

For years, creditors have used various scoring systems to help automate & evaluate applicants' credit reports and general ability to repay the requested credit. The mortgage industry endorsed and adopted a statistical scoring model developed by Fair Isaac Corporation. The "FICO" score, as it is widely known, is used by most lenders to help gauge the risk of future default by prospective loan applicants.

This statistical model attempts to predict risk by focusing on a borrower’s repayment pattern with existing & previous creditors, the length of a borrower’s credit history, the total amount of credit that borrower has access to and is using, and whether a borrower is actively searching for additional credit ("Inquiries" - notations of companies who access your credit file). The weighting of the various "predictive characteristics" was developed through study of a large sample of mortgagor payment records over a long period of time.

The result? After the program churns though your credit file, your "FICO" score is computed. The number ranges from 400 to 850 (the higher the number, the lower the predicted risk). Because people are accustomed to letter grades, like a report card, FICO score ranges are often referred by their letter "grade" equivalent. For example: 760+ = A++, 740 - 760 = A+, 720 - 740 = A, 680 - 720 = B+, 660 - 680 = B, 620 - 660 = B-.

Some lenders vary their definitions, but generally speaking, a score greater than 620 is good enough to qualify for any conventional loan. Depending upon the down payment, scores above 740 will qualify for the best rates, and above 760 for the lowest mortgage insurance cost, if applicable. Generally speaking, applicants being graded B, C, or D will be offered fewer options, with larger down payment requirements and higher interest rates and/or closing costs. Specifically speaking, there may be special first-time homebuyer programs for lower-income borrowers and/or borrowers buying in specifically designated areas, VA loans, and FHA loans whereby this is not the case -- suggest you call office to discuss if you believe that you might benefit from one of these loans types.

Having your credit report ordered (with FICO scores) and reviewed by a professional mortgage broker during the prequalification stage is important so that you aren’t surprised later - we highly recommend that you be made aware of your credit score (meaning, the one which will be used by the mortgage underwriter), thus mortgage program options, upfront.  See ordering your credit report.

For more about credit scoring, See FTC: Credit Scoring Information

 


Licensed by PA Dept of Banking

Purchasing Refinancing Prequalification Loan Programs
Credit Report Information First Time Home Buyer? Market Outlook
Calculators Helpful Links
About PMC