Credit score rankings are based primarily on information included in one or more of a borrower's national credit repository files maintained by TRW, Equifax and TransUnion. Some proprietary scoring models factor in behavioral data on the number of jobs you've held, installment debt usage, length of time in your present house, marital status and others. Using sophisticated statistical formulas, the programs slice and dice your personal data into a single risk-predictive numerical ranking. How you score tells a lender about your relative likelihood of default or bankruptcy.
For FICO scores - named after the San Rafael, Calif.-based Fair, Isaac & Co. that created the test - the higher you score on an SAT-like scale from 400 to about 900, the safer credit bet you are. For the MDS score - named after a firm with those initials in Atlanta - the lower your score on a scale of zero to 1,300, the better.
Lenders can order either or both scores electronically at low cost from credit repositories or bureaus. Most mortgage lenders don't use them routinely yet, say industry experts. But Freddie Mac's new directive is likely to make them commonplace.
Freddie Mac provided specific numerical cutoff points to lenders governing how they should handle the underwriting of loan applications. For applicants who score 660 or above on the FICO scale, lenders need do only "basic" underwriting - the minimum necessary to establish a creditworthy borrower's willingness to repay.
For scores of 660 down to 620, on the other hand, Freddie asks for more intensive work-ups that focus on "all aspects" of a borrower's credit background. For everybody under 620, Freddie flashed a red caution light: Not only should the lender "perform a particularly detailed review" of all aspects of the applicant's credit history, but should also assume that the borrower is not such a hot risk for a mortgage.
"Unless there are extenuating circumstances," said the company's letter to all lenders, "a credit score in this range should be viewed as a strong indication that the borrower does not show sufficient willingness to repay (the mortgage) as agreed."
Fannie Mae, Freddie Mac's rival, has no plans to issue a similar letter, said a top official. But it has been researching credit scores intensively for the past year, permits lenders to use them, and is "incorporating them in more and more" underwriting activities.
What's the upshot of the coming switch to credit scoring for you as a borrower? A couple of thoughts: First, though never before a factor, your credit score may now play an important role in determining whether and on what terms you receive a home mortgage. Yet you have no current legal right to demand to see your score or receive information on how it's interpreted by your lender. The Federal Trade Commission is working on a rule that would require such disclosure, just as you're entitled to see a copy of your credit report.
Second, reliance on credit scoring increases the potentially harmful effects of erroneous and outdated information in your credit files. Freddie Mac says it has a "high degree of confidence" in the quality of credit repositories' data, but urges lenders to "look beyond" raw scores to ferret out and correct potentially unfair, bad data on any applicant.
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