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| GENERAL QUESTIONS |
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Credit Report |
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How are the FICO scores calculated? |
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What are the highest and lowest FICO scores? |
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Will my score actually change over time? |
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What's the most important factor in a Score? |
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How can I improve my FICO score? |
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Where can I turn for help cleaning up my credit? |
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How do I dispute an item on my credit report? |
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Once an error is fixed when is my score updated? |
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What is a credit score and how will Shearson Mortgage use credit scoring to evaluate my application? |
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ABC's of Mortgage Credit Scores |
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Credit Scoring |
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Origin and Basis of FICO Scores |
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Recent Changes to FICO Scoring Methodology |
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How are the FICO scores calculated? |
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Every FICO score is calculated at a credit-reporting agency using a mathematical formula that evaluates many types of information on your credit report at that agency. By comparing your information to the patterns in millions of past credit reports, the score identifies your level of future credit risk.
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What are the highest and lowest FICO scores? |
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FICO scores range from 300 to 850. The higher the score, the lower the predicted credit risk for lenders.
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Will my score actually change over time? |
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Yes
It's normal for scores to change. Your FICO score today is likely different from your FICO score of a few weeks ago. Your score changes when the underlying information on your credit report changes. Since this can happen anytime, lenders usually make decisions based on your most current FICO score and not on yesterday's score.
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What's the most important factor in a Score? |
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FICO scores consider five main kinds of credit information. Listed from most important to least important, these are:
- Payment history
- Amount owed
- Length of credit history
- New credit
- Types of credit in use
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How can I improve my FICO score? |
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Your FICO score analysis will suggest things you can do to improve your score overtime. Generally, people with high FICO scores consistently:
- Pay bills on time.
- Keep balances low on credit cards and other revolving credit products.
- Apply for and open new credit accounts only as needed.
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Where can I turn for help cleaning up my credit? |
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Several non-profit agencies offer free counseling to assist you in this regard. Consult the yellow pages or the Internet under the heading Credit Counseling Services to find a counseling service in your area.
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How do I dispute an item on my credit report? |
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You must contact the credit agencies directly and dispute the reported item. Following is the information on how to contact the agencies:
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Once an error is fixed when is my score updated? |
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Your very next score will reflect the updated information. Since FICO scores are recalculated every time they are requested (rather than stored as part of your profile), they respond to meaningful changes instantly. What's a meaningful change? An update to your address, for example, would have no effect on your score. On the other hand, substantially lowering the balance on a maxed out credit card might have a notable impact on your score.
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What is a credit score and how will Shearson Mortgage use credit scoring to evaluate my application? |
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A credit score is one of the pieces of information Shearson Mortgage will use to evaluate your application. Banks and other financial institutions have been using credit scores to evaluate credit card and auto applications for many years, but only recently have mortgage lenders begun to use credit scoring to assist with their loan decisions.
Credit scores are based on information collected by credit bureaus and information reported each month by your creditors about the balances you owe and the timing of your payments.
A credit score is a compilation of all this information converted into a number that helps a lender to determine the likelihood that you will repay the loan on schedule.
The credit score is calculated by the credit bureau, not by the lender.
Credit scores are calculated by comparing your credit history with millions of other consumers. They have proven to be a very effective way of determining credit worthiness.
Some of the things that affect your credit score include your payment history, your outstanding obligations, the length of time you have had outstanding credit, the types of credit you use and the number of inquiries that have been made about your credit history in the recent past.
Credit scores used for mortgage loan decisions range from approximately 300 to 900. Generally, the higher your credit score, the lower the risk that your payments won't be paid as agreed.
Using credit scores to evaluate your credit history allows us to quickly and objectively evaluate your credit history when reviewing your loan application. However, there are many other factors when making a loan decision and Shearson Mortgage never evaluates an application without looking at the total financial picture of a customer.
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ABC's of Mortgage Credit Scores |
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The mortgage industry tends to create its own language and credit rating is no exception. BC Mortgage lending gets its name from the "letter-grading" of one's credit based on such things such as payment history, amount of debt payments, bankruptcies, equity position, credit scores, etc.
We have compiled a guide to help you estimate your credit grade. This is only a guide as many companies have exceptions that may result in either stricter or more lenient guidelines.
General Guide to Credit Grades
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Credit Debt |
Max |
Mortgage |
Revolve |
Install |
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Score |
Ratio |
LTV |
30 |
60 |
90 |
30 |
60 |
90 |
30 |
60 |
90 |
| A+ |
670 |
36 |
95 |
0 |
0 |
0 |
2 |
0 |
0 |
1 |
0 |
0 |
| A- |
660 |
45 |
95 |
1 |
0 |
0 |
3 |
1 |
0 |
2 |
0 |
0 |
| B |
620 |
50 |
85 |
2 |
1 |
0 |
4 |
2 |
1 |
3 |
1 |
0 |
| C |
580 |
55 |
75 |
4 |
2 |
1 |
6 |
5 |
2 |
5 |
4 |
1 |
| D |
550 |
60 |
70 |
5 |
3 |
2 |
8 |
8 |
4 |
7 |
6 |
2 |
| E |
520 |
65 |
60 |
6 |
4 |
3 |
10 |
10 |
6 |
10 |
8 |
3 |
| Bankruptcy / Foreclosure |
| A+ |
None Allowed Within 10 years |
| A- |
Minimum 2 Years, Re-Established Credit |
| B |
Minimum 2 Years, Some Late payments |
| C |
Minimum 1 Year |
| D |
Discharged |
| E |
Possible Current |
The figures shown here are estimates. When trying to figure your credit grade, keep in mind the following principles:
Other Things Being Equal-When your have derogatory credit, all of the other aspects of the loan need to be in order. Equity, stability, income, documentation, assets, etc. play a larger role in the approval decision.
Worst Case Scenario-When determining your grade, various combinations are allowed, but the worst case will push your grade to a lower credit guide. Mortgage Lates and Bankruptcies are the most important.
Going Once, Going Twice-Credit patterns are very important. A high number of recent inquiries and more than a few outstanding loans may signal a problem. A "willingness to pay" is important, thus late payments in the same time period is better than random late payments as they signal an effort to pay even after falling behind.
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Credit Scoring |
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In a nutshell, credit scoring is a statistical method of assessing the credit risk of a loan applicant. The score is a number that rates the likelihood an individual will pay back a loan. The score looks at the following items: past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit, number of inquiries.
Credit scoring will place borrowers in one of three general categories.
First, a borrower with a score 680 and above may be considered an A+ loan. The loan will involve basic underwriting, probably through a "computerized automated underwriting" system and be completed within minutes. Borrowers falling into this category may have a good chance to obtain a lower rate of interest and close their loan within a couple of days.
Second, a score below 680 but above 620 may indicate underwriters will take a closer look at the file in determining potential risks. Borrowers falling into this category may find the process and underwriting time no different than in the past. Supplemental credit documentation and letters of explanation may be required before an underwriting decision is made. Loans within this FICO scoring range may allow borrowers to obtain "A" pricing, but loan closing may still take several days or weeks as it does now.
Third, borrowers with a score below 620 may find themselves locked out of the best loan rates and terms offered. Mortgage professionals may divert these borrowers to alternate funding sources other than FNMA and FHLMC. Borrowers may find the loan terms and conditions less attractive than the "A" loans, and it may take some time before a suitable funding source is located.
As more companies utilize credit scoring, the loan approval and closing time will be compressed for most consumers. In the future, a high FICO score may be your ticket to a speedy and competitively priced mortgage loan.
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Origin and Basis of FICO Scores |
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FICO(r) scores were developed by Fair Isaac & Company, Inc. for each of the credit repositories. The scores are: (Equifax) Beacon(r), (Experian formerly TRW) Experian/FICO and (TransUnion) Empirica(r). They are simply repository scores meaning they only consider the information contained in a person's credit file; they do not consider a persons income, savings or amount of a down payment for a mortgage.
The scores were designed to assess risk. They are useful in directing applications to specific loan programs and to set levels of underwriting, i.e. streamline, traditional or second review. The scores are objective, consistent, accurate and fast.
Many people in the mortgage business are skeptical about the accuracy of FICO scores. Scoring has only been an integral part of the mortgage process in the past few years; however, the scores have been in use since the 1950's by retail merchants, credit card companies, insurance companies and banks for consumer lending. The data from large scoring projects emphasizes the accuracy, the predictive quality of the scores. Large portfolios have been scored for mortgage servicing and investment groups, and again, they demonstrate that FICO scores work.
The scores were developed from each repository's database using actual loan performance. A sample of over 750,000 consumers per repository was used. The repositories have each made great strides to increase the accuracy of their respective database through computer technology and internal monitoring. There is a new standard reporting format for credit grantors to use when sending electronic information to the repositories; this is the critical first step to providing accurate data.
The scores use a multiple scorecard design. Each repository uses 10 individual scorecards, and the models at each repository are the same. This increases accuracy and optimizes the predictive variables for each subpopulation. (For example, a borrower with two 30-day late payments will be scored against a population with some minor delinquencies.) This feature may cause a borrower with delinquencies to score in the same range as a borrower without delinquencies. Scorecards are reviewed and updated every twenty-four months.
The actual scoring process is proprietary, and the algorithms are copyrighted. We can share the predictive variables, the portion of the credit file considered and the weight as provided by Fair Isaac. They are:
- Previous credit performance (35%)
- Trade line information specific to payment history
- Current level of indebtedness (30%)
- Current balance compared to the high credit
- Time credit has been in use (15%)
- Opening date
- Types of credit available (15%)
- Installment loans, revolving accounts, debit accounts
- Pursuit of new credit (less than 5%)
- Number, recentness and frequency of credit inquiries
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Recent Changes to FICO Scoring Methodology |
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FICO has changed the way it factors credit checks, inquiries. These changes should minimize the "negative" effects that aggressive rate shopping or the normal mortgage process can have on a mortgage applicant. In the new Beacon version, the deduping process has been expanded beyond seven days. One variable counts the number of days within 365 days of scoring. If there has not been an inquiry, the deduping mechanism is not activated. If there is a consumer originated inquiry within the past 365 days from mortgage or auto related industries, these inquiries are ignored for the first 30 calendar days from scoring; then, multiple inquiries within the next 14 days are counted as one. Each inquiry will still appear on the credit report.
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