FIRST-TIME homebuyers, move-up purchasers and homeowners refinancing could get a fairer shot at obtaining a mortgage if lenders heed the latest instructions from one of the giants of the home loan field.
In a memorandum sent to lenders nationwide, Freddie Mac -- the government-chartered, privately run corporation that purchases billions of dollars of newly originated home loans annually -- urged mortgage companies and banks not to base their approvals of applicants solely on credit scores.
Though only rarely used for home mortgages prior to 1994, credit scores have become the critical factor in many home loan applications during the past 18 months.
A high score generally gives an applicant a green light to the best rates, lowest fees and fastest processing times at lending institutions. A low score gets the opposite: It can derail an application, slow down turnaround times and give the lenders justification to charge a higher rate and fatter fees.
The most common score used by mortgage companies is known as a "FICO," developed by San Rafael, Calif.-based Fair, Isaac & Co. FICO scores are based on complex statistical evaluations of the raw data in your electronic credit bureau files maintained by the three private credit "repositories" -- Equifax, Trans Union, and Experian (formerly TRW).
The repositories receive and store information on most consumers' credit activities supplied by banks, credit card companies, department stores and most other large creditors. Late repayments on loans, heavy debt loads, court judgments, foreclosures or bankruptcies all count as negatives in a borrower's credit file.
FICO scores can run from above 800 to below 400. Both Freddie Mac (the Federal Home Loan Mortgage Corp.) and its rival, Fannie Mae (the Federal National Mortgage Association), have issued guidelines that give preference to applicants with FICO scores of 620 or above. Freddie Mac, for example, last year distributed an underwriting matrix suggesting that lenders "perform a particularly detailed review of all aspects of [a] borrower's credit history" if the applicant's FICO score is less than 620.
"Unless there are extenuating circumstances," the guide said, "a credit score in this range should be viewed as a strong indicator that the borrower does not show sufficient willingness to repay as agreed."
