Credit scoring is an objective means of determining the creditworthiness of potential borrowers based on a number system. It is a numerical representation of the borrower’s credit profile by assigning specific numerical values ​​to different aspects of the borrower. These numbers are adjusted up and down based on the strengths and weaknesses of particular ratings. All lenders use credit scores as part of the underwriting process.

For example, someone with a large available line of credit that is barely used will likely score higher than someone with lower credit limits but whose credit cards are maxed out. Someone with a long history of employment at the same company would score higher than someone who has just joined a new company. Numbers from all categories are aggregated and a credit score is assigned based on these various criteria.

Credit scores also play an important role in automated underwriting, as Fannie Mae and Freddie Mac have identified a strong correlation between mortgage performance and credit scores. The higher the score, the better a borrower’s credit risk; the lower the score, the higher the risk of default.

FICO is a system developed by Fair, Isaac & Co. and used by Experian. BEACON is a credit score used by Equifax.

TransUnion calls their score EMPIRICA. These scores are the result of very complex calculations made by a computer that take into account all aspects of the borrower’s credit file. Items considered include the following:

1) Number of open accounts
2) Total credit limit
3) Types of credit (eg, credit cards, installment loans)
4) Length of credit history (eg, when opened, last activity)
5) Total amount of outstanding debt
6) Number of late payments in the last 30-60-90 days
7) Presence of adverse public records (for example, bonds, judgments or bankruptcies
8) Number of recent credit inquiries
9) Restoration of positive credit history after past payment problems

Each of these three main credit bureau scores is calculated a little differently. For example, FICO considers credit history as 35 percent of the total score, amounts owed as 30 percent, length of credit history as 15 percent, and new credit and types of credit used as ten percent each. Regardless of the actual calculation, all credit bureaus produce similar credit scores, ranging from about 300 to 850. While lenders can’t tell you exactly how each credit score is calculated, they can tell you what cut-off scores they use to qualify borrowers for credit. various home loan programs.

The secondary market will have interest rate price adjustments based on FICO score and LTV. Fannie Mae and Freddie Mac guidelines generally consider those with scores above 720 to be an acceptable credit risk and therefore will have little interest rate adjustment. Those with scores between 620 and 660 are considered marginal and will undergo further review. Most lenders will not accept loans with FICO scores below 620, except for certain products and programs. Borrowers should always check their credit report before applying for a mortgage.