Credit Scoring & Your FICO Scores
Several years ago Fannie Mae and Freddie Mac began to track and explore risk factors on why a particular mortgage went bad and was foreclosed upon. Working in connection with TRW credit reporting agency, now called Experian, a credit risk or credit score number was developed to measure the borrower's credit standing and the likelihood of default or delinquent payments. Both Fannie Mae and Freddie Mac developed automated or computerized underwriting matrix's - which if a borrower's loan mortgage meets - the documentation previously collected from the mortgage lender is greatly reduced.
Thus FICO was born!!
FICO is the generic name for credit scoring. TRW / Experian's is called Fair Issac which is how the letters FICO is formed. The credit reporting agency of TransUnion calls their credit scoring Empirica, and Equifax, the other credit reporting agency, calls their credit scoring Beacon.
Many factors effect the credit scoring. Such factors are:
Current delinquencies
Outstanding collections or charge offs
Length of credit history
Public records
High use of credit balances
Number of accounts with balances
Number of accounts opened
Installment vs. revolving accounts
How have you paid your debts?
How often have you paid your bills after they were due?
How many consumer loans and open chare accounts do you have?
What are the current balances on these accounts?
How long have you had credit? Generally, the longer you have had and have successfully managed credit, the higher your credit score.
How many times have you authorized a lender to check your credit record?
How many new accounts have been opened recently?
What types of credit do you have in use?
Do you have a mixture of credit? For example… credit cards, personal loans, etc.?
So what is a good FICO score?
Although one's FICO score is NOT the only factor of whether a mortgage loan is finalized or not, nearly al lenders use FICO scores as part of the approval process.
FICO scores can range from 300 to 899. The higher the FICO score the better financial risk you are in the lender's eyes and less concern a lender will be with other traditional factors such as housing and debt ratios. Mortgage specialty programs often require certain FICO scores in order to qualify for a particular mortgage program.
FICO Score Categories
700 & above: This is considered an excellent credit score,
above 720 is called “Accept plus for automated underwriting.
680 to 700: This is considered very good
660 to 680: This is the standard automated approval score
620 to 660: This is a cautious risk score
600 to 620: Underwriter needs to carefully review mortgage application
Below 600: Extreme concern should be taken by the underwriter to determine acceptable risk
