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."
For scores of 620 to 660, the Freddie Mac matrix called for a less rigorous, but still "comprehensive," credit evaluation. For borrowers with scores higher than 660, Freddie Mac's guide presumed that they're willing to repay the loan as agreed, and that lending underwriters merely have to "confirm" this fact.
During the past year, many lenders apparently have taken these scoring demarcations as cast in stone, and have declined to proceed with loans bound for sale to Freddie Mac or Fannie Mae where applicants' scores are below 620. Freddie Mac acknowledged as much in its memorandum last week. "Some of you," wrote Senior Vice President David Andrukonis, "may be interpreting a FICO bureau score of 620 as a 'line of acceptability' that can't be crossed."
But that's wrong, said Andrukonis. "A credit score shouldn't be used as the only factor in an underwriting decision. A FICO score of 610 may indicate a weak but acceptable credit reputation that you can balance with other strengths documented in the loan file." Conversely, an applicant with a 630 FICO may be a bad risk, even though his or her score exceeds 620.
The Freddie Mac memorandum gives examples of how a marginal credit score can be offset by other factors, particularly a higher-than-average equity stake in the property. A refinancing applicant with a FICO score of just 585, for instance, may appear to be a risky bet, but could be readily acceptable if he or she has a substantial equity stake in the home -- such as 30 percent of the resale value of the property. Borrower scores below 585 -- viewed by most lenders as very thin ice -- might even be acceptable under Freddie Mac's new guidance, provided the negative credit file information producing the low score was caused by "extenuating circumstances" beyond the borrower's control that aren't likely to recur. These could include a sudden employment interruption due to a factory shutdown, an incapacitating illness or accident, or a natural disaster.
Freddie Mac also emphasized that applicants who filed for bankruptcy or went to foreclosure in past years -- events that send credit scores plummeting -- needn't be rejected as mortgage applicants out of hand. Bankruptcies and foreclosures matter to Freddie Mac only during the seven- to 10-year period that the Fair Credit Reporting Act permits them to remain in a borrower's credit file.
A footnote on credit-score disclosure: Though scores are increasingly important determinants of whether and at what price you get a loan, you currently have no legal right to obtain your score from a lender. Under Federal Trade Commission guidelines, you can demand a copy of your entire credit file. But your lender doesn't have to show you your score. Some lenders are willing to disclose, however, so you're free to ask.
Pub Date: 7/13/97
