How do you score? Test: Advocates say it's just a tool. Critics say it can cost you a mortgage. More lenders are relying on a score of your creditworthiness.

March 02, 1997|By Sara Marsh | Sara Marsh,SPECIAL TO THE SUN

It happens a thousand times a day, millions of times each year.

A potential homebuyer -- with hopes of being able to get a great interest rate -- applies for a mortgage and begins down that path toward purchasing a home.

With good credit -- no tardy bills, no large debts, few credit cards and a high credit score -- it's likely an applicant could be approved for a loan in as little as 30 minutes.

An applicant with a less-than-sterling credit history or maybe no credit history might bomb out especially on their credit score.

Credit score?

A number buried within a person's credit report can let them sail through the loan process or stop them cold. It's most commonly called a FICO score, which is a numerical credit profile of an applicant.

While some lenders welcome credit scoring, a device long used by the credit card industry and now being aggressively pushed by the Federal Home Loan Mortgage Corp. -- Freddie Mac -- and the Federal National Mortgage Association -- Fannie Mae -- others question the scores' usefulness and reliability.

Some lenders argue the scores, devised by a California company, don't take into account consumers' incomes and ability to pay their debts. Instead, the scores focus on the number of credit cards a consumer holds, or penalizes him for too many credit inquiries, or having too little credit, some local lenders say.

Opponents of credit scores also argue that they have no idea how various components of the scores are weighted and that it takes too long to get inaccurate information on the reports corrected. They also fear Freddie Mac and Fannie Mae are putting too much emphasis on the scores, which could adversely affect minorities and low-income residents.

But supporters of credit scores see another picture.

They argue that the scores allow lenders to quickly move consumers with good credit histories through the lending process, leaving more time to work with those with poor credit. The credit scores may also highlight trends that underwriters may not have noticed in the past and eliminate discrimination, some lenders say.

The implementation of credit scores could profoundly affect the home-buying experience for many consumers, forcing some with blemished records to pay more for the home of their dreams.

Credit scoring was pioneered 40 years ago by Fair, Isaac & Co. of San Rafael, Calif, said David Shellenberger, a product manager for the firm. While other companies have developed different models, those pioneered by Fair, Isaac (FICO, Beacon and New Delphi/Empirica) are used by the nation's three major credit reporting services, or repositories: Equifax Inc., Experian (formerly TRW) and Trans Union.

Fair, Isaac takes a sampling every two years of 750,000 to 1 million credit files nationwide and compares the files to information about how well those consumers actually met their obligations over time. Then, using statistical models to predict future performance, the firm arrives at a range of numbers, with a score in the 300s representing a deadbeat and a score in the 800 range representing someone who's a superb risk.

"It's not a new concept," Shellenberger said. "Credit scores are used extensively, especially in [approving] auto loans and credit cards."

But credit scores are new to the mortgage industry.

In July 1995, Freddie Mac suggested in a notice to lenders that they start using credit scores to supplement their manual underwriting practices. Fannie Mae followed suit three months later.

"Credit scores are extremely predictive of [the success of] mortgage loans," said Connie Ferran, director of policy management for the McLean, Va.-based Freddie Mac. "We think this can be very good. It is objective, it can make the lending process easier."

Credit scores come into play when a lender requests credit information on a borrower or borrowers, in the case of couples, from one of the credit-reporting services.

Using the scoring methods developed by Fair, Isaac, a borrower's credit history is assessed at that particular time and assigned a score. That score, which is not permanent and changes as a borrower's credit history improves or worsens, goes to the lender.

Each repository uses its own scoring method, but the most prevalent one -- the FICO score used by Experian/TRW, raises a caution flag for borrowers with a score of 620 and below. Freddie Mac and Fannie Mae consider a score of 660 and above to be good credit, but suggest lenders take a close look at borrowers at 620 and below.

Demographic data, such as race and religion, are not included in a credit score.

According to Freddie Mac, which spent six years tracking loans that originated in the late 1980s and early 1990s, payment delinquencies rose dramatically for high-risk borrowers -- those who fit the profile of a borrower assigned a score of 620 or below.

"Credit scores below 620 have significant risk," Ferran said.

But not all lenders agree.

A flawed system?

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