"Credit scoring is nothing new; it has been used for years in approving credit cards and car loans. But now it is being used in mortgage underwriting," said Paul Mondour, senior director of regulatory affairs for the Mortgage Bankers Association of America (MBA).

"Credit agencies crunch numbers taken from public records. That personal credit information is weighted according to a formula and a single number is produced. The theory is that a no-brainer mortgage decision results," Mondour explained.

"Credit scoring is an attempt to automate the process previously done by human underwriters. It's faster and eliminates subjectivity. One person should get the same result as another," he said.

WHAT COUNTS MOST IN A CREDIT SCORE?

"Two of the most heavily weighted aspects are past payment history, and debt utilization, which measures whether consumers are maxed out on credit cards," said David Shellenberger, product manager for Fair, Isaac and Co. of San Rafael, Calif., which developed a widely used credit-scoring model.

The firm's scores range from a low of about 350 to a high of 900.

If the applicant has a score of 620 or less, this indicates a high-risk loan; 621 to 660 is medium-risk; and 660 and above is low-risk.

Economists at the Federal Reserve Board analyzed the performance of loans and concluded that borrowers with low scores have substantially higher mortgage delinquency rates than those with medium or high scores.

A boost to credit scoring occurred three years ago, when Freddie Mac (the Federal Home Loan Mortgage Corp.), one of the major players in the mortgage industry, decided that credit-bureau scores are powerful underwriting tools that are highly predictive of loan performance, and recommended their use to lenders.

Fannie Mae (the Federal National Mortgage Association), the other giant in the secondary mortgage market, joined in the endorsement.

Marc Smith, president of the MBA, said credit scoring now is being used in about two-thirds of all home loans and the percentage is increasing rapidly.

"While not perfect, it is based on fairness and objectivity," he said.

Proponents of credit scoring maintain it is totally unbiased. On the other hand, Mondour said some critics contend there is bias built into the computer model.

"For instance, a negative factor is to have more than one employer in two years. Some say that is not relevant because there is a higher frequency of job changing among minorities," he said.

Objectivity is supposed to be achieved by not evaluating these factors: age, race, religion, gender, national origin, marital status, income, employment and where you live.

Even so, Freddie Mac found that African-American borrowers were about three times more likely to have high-risk scores than whites, and Hispanic borrowers were about twice as likely to have high-risk scores.

"Two years ago, many consumers had concerns about credit scoring," said Sharon McHale, a spokesperson for Freddie Mac. "Many were unaware of the process, and a lot of misinformation was going around, especially about what can hurt your score and what can help it."

Thomas Ducey, vice president of credit policy for Fannie Mae, said 65 percent of all consumers have a score of 700 or more, while only 15 percent score less than 620.

"The odds of default increase dramatically on scores below 620," he said.

While credit scoring may be objective, there is still the possibility for errors, said Stephen Brobeck, executive director of the Consumer Federation of America in Washington, D.C.

"Inaccurate information in a credit report could unfairly lead to denial of credit," he said. "And it is well documented that credit reports are not 100 percent accurate. Even if accurate, credit reports only contain quantitative information; other variables should be considered in making a mortgage decision, such as work history, income and assets."

Actually, much of this additional information is considered in another new development called mortgage scoring.

Credit scoring is just one of the major components of mortgage scoring, which is a more comprehensive evaluation. It assesses such additional information as the applicant's income, expenses and the value of the property to be purchased.

Previously, these elements were checked by a human underwriter. Now they are fed into a computer, which gives the lender a recommendation about whether the loan meets the criteria for approval.

This process, known as automated underwriting, is much faster, more objective and less costly by as much as $300 to $1,400 per loan. Some of the savings may be passed on to the borrower.

Tony Porter, vice president of industrial markets for PMI Mortgage Insurance Co. in San Francisco, estimated that credit scoring is used in the decision-making process in 80 percent of all loans today, while mortgage scoring is used in only a quarter to a third of loans.

Porter was the moderator of a mortgage-scoring round table at the MBA's National Secondary Market Conference in Chicago in May.

Porter emphasized that no lender rejects a loan applicant solely on the basis of a low credit score: "If a score is low, the application will be personally reviewed by an experienced underwriter."

"The need for a human being will never be eliminated," said David Fisher, team leader at Key Mortgage Services, a subsidiary of Baird & Warner Inc., in Des Plaines, Ill.

Fisher noted that it is not just late payments that can drive down a credit score: "If you have a number of credit cards that are close to the maximum, it can count against you, even if you continue to pay on them on time."

He added that credit scores also can be lowered by outstanding collection accounts, tax liens and late payments of car loans and even student loans. However, late rent payments are not reported.

Fisher explained that each mortgage applicant receives a score from the three credit bureaus. "The scores are all different, so we either use the middle score or take an average."

He praised the speed of automated underwriting. "But credit scoring sometimes can jump up and bite you."

That happens when an unexpected low score arrives from one of the major credit-tracking companies. "It drives me crazy, because there's not enough time to get it fixed for that home purchase to go through," said Fisher.

"The low score may be from wrong information in the credit report. For example, sometimes a hospital bill can go to collection and then be paid off, but the hospital does not report the payment."

Fisher recommends that potential home buyers check out their credit report well before applying for a mortgage.

Koenig & Strey's Grunwald goes a step further: "I offer to run a credit report for my customers. You never know how it will come out. Even if they have an excellent payment record, other factors can lower the score."

She said that once a buyer makes an offer on a house, there is a contingency period of 30 to 45 days to get a mortgage. A bad credit report could kill the deal.

She added that credit scoring has become increasingly important in the last year, partly because Fannie Mae and Freddie Mac are encouraging automated underwriting with their Desktop Underwriter and Loan Prospector systems.

IMPROVING YOUR CREDIT SCORE

Fannie Mae recently published a booklet - "What Are Credit Scoring and Automated Underwriting?" - to explain the new tools that lenders use to evaluate mortgage applications. (It is available free by calling 800-732-6643).

Ducey, Fannie Mae's vice president of credit policy, explained the reasons for the booklet: "Since Fannie Mae is using credit scoring, we think consumers should understand it. We don't want them to be afraid of the unknown, or of a computer score that they know nothing about and think may be unfair."

The booklet, which stresses that the final decision on your loan application is made by the lender and not by a computer, makes these recommendations to improve your credit score:

-- Avoid becoming delinquent on any credit obligations, including credit cards, auto loans or other installment loans.

-- Avoid the overuse of credit cards and other credit accounts.

Ducey predicted that mortgage scoring, which is newer and more predictive of mortgage success, will be used in every loan within two or three years.

Freddie Mac's McHale pointed out that her firm's Loan Prospector automated underwriting system is a form of mortgage scoring. "In some cases, it allows us to approve loans that may not have been approved by a human underwriter," she said.

She added that half of Freddie Mac's loans involve automated underwriting, which can make a loan decision in two minutes, rather than weeks. ------------------------------- Check your credit

A copy of your credit report should be obtained before seeking a mortgage. Contact these credit bureaus: Equifax, 800-685-1111 Trans Union, 800-916-8800 Experian, 800-682-7654