NEXT TIME you shop for a mortgage, here's a question to add to your evaluation list for competing lenders: Has the mortgage company adopted the most consumer-friendly, up-to-date credit scoring software available - something known by the ungainly name "Next Generation FICO"?
If the answer is no, you should be aware that:
You could receive lower credit scores with this lender than you deserve. Those lower scores, in turn, could allow the lender to charge you a higher interest rate.
Even slight imperfections on your credit files may lower your credit scores and throw you into a "subprime" category of mortgage applicants. This is especially so if you are already in a borderline credit situation, with a few late payments or a collection on your files.
What's so important about Next Generation FICO? And why could it mean tens of thousands of dollars to you as a homebuyer?
Consider this: Every time you get a rate quote for a mortgage, the lender orders credit information on you.
Most lenders don't want your full files from the three national credit repositories - Equifax, Experian and TransUnion. Instead, they just want your FICO scores, produced by running your credit histories through software models installed at the repositories under licenses with Fair, Isaac & Co.
Fair, Isaac developed FICO credit-risk scoring models more than a decade ago. By the mid-1990s, giant investors Freddie Mac and Fannie Mae required FICO scores on all mortgage applications submitted electronically.
The entire industry now uses FICO scores to evaluate virtually every loan applicant.
Though scores originally were kept secret from consumers, many loan officers and brokers share FICOs with their customers.
In California, they are required by state law to do so; elsewhere it's voluntary. Scores of 700 or higher generally mean the applicant is low-risk. Scores below 600 suggest the applicant has had credit problems in the past, and is statistically at higher risk to default.
But there is a problem with FICO scoring that has received almost no public attention: Many lenders intentionally or unknowingly do not use the latest-technology FICO scoring model available to them.
In the process, they deny consumers a fair shot at generating their highest possible scores.
Since the 1990s, Fair, Isaac has developed a succession of improved models of its software - each, according to the company, more sensitive to consumer behavior and credit variations than its predecessor.
Early models, for instance, penalized applicants for excessive "inquiries" about their credit, even though all the inquiries simply represented credit checks by competing mortgage lenders for the same loan.
More recent models removed those penalties and numerous others considered unfair to consumers.
The latest software model - dubbed Next Generation - is designed to reward borrowers who truly are low risk with much higher scores. It also purports to identify applicants who represent very high risks of default, and assigns them lower scores.
Some low-risk borrowers who might score 680 or 700 using older FICO models could now score 780 or 800 with the same credit histories using the Next Generation software.
More importantly, many people on the credit "bubble" score higher with the latest model.
Single dispute hurts
Take this situation commonly faced by such borrowers: They've always paid their debts on time, but they were hit with a big, unexpected medical expense and had a dispute with the insurance company over coverage.
The unpaid medical-service providers then hired a collection agency, and the disputed medical bills are an intensifying blot on the borrowers' credit files, lowering their scores substantially under older versions of the FICO software.
The Next Generation model, however, "sees through" the medical payment issue and focuses on the consumers' other, exemplary credit characteristics: years of on-time payments on a substantial number of credit accounts.
It awards compensatory points for all that good behavior, rather than emphasizing the lone, recent medical dispute.
`Easily 100 points'
The increase in credit scores for these applicants from using one of the older models to the newest? "Easily 100 points," said Karlene Bowen, a Fair, Isaac scoring expert who spoke about the issue to the National Credit Reporting Association's annual convention here last week.
The company introduced its Next Generation model more than two years ago, but many lenders have not yet switched their systems to it - effectively denying applicants their fairest scores.
Do your FICO scores really affect what you pay on a mortgage? You bet. FICOs of 720 and higher frequently are charged 2, 3 or more percentage points lower interest rates than applicants with scores in the 500s.
But if the lender's choice of FICO model can move your score up or down by 50 or 100 points - more than enough to affect your mortgage rate - what's going on here?
Next: Why not the fairest FICO?
Kenneth R. Harney is a syndicated columnist. His e-mail address is firstname.lastname@example.org. Send letters care of The Washington Post Writers Group, 1150 15th St. N.W., Washington 20071.