Question: How do you keep your scores up? What happens if you miss a FICO score minimum by just a couple of points? Many times, it can be the difference between a good or poor price for your loan. More importantly, missing a FICO by just a few points can result in the unavailability of a desperately needed loan program to suit your particular needs or worse, a complete denial of your loan request.
Answer: It has been said “close only counts in pitching horse shoes and hand grenades.” Add credit score minimums to that. Remember that mortgage lending is more a business of exceptions than rules. Independent mortgage brokers still rely on a personal touch in coordinating the underwriting process. Unfortunately, for borrowers relying upon lenders that utilize automated underwriting systems exclusively, as the majority of Internet lenders do, a slightly missed score will very often result in a declination. What is even more upsetting is that the score is usually made up of inaccurate information, resulting in a score that is artificially lower than it ought to be. Based on the credit scores obtained through an automated underwriting system, a borrower’s file may be price-adjusted for the risk factor of lower credit scores costing the borrower additional discount fees at settlement. What to do?
Credit inquiries and outstanding debt in relationship to the remaining available credit on a credit card or a credit line all play a part in the scoring process. It is not just derogatory credit and its frequency or tenure that can negatively impact the scoring calculation. If you loan officer knows what drives a score, he or she can often quickly and easily manipulate the score by having inaccurate items removed. The loan officer can also advise the borrower credit items to payoff and which items to leave open after a payoff (closing the account entirely can have an adverse effect on the score by reducing the amount of credit available to the borrower). My main point here is to be sure that your loan officer understands what is driving the score in the wrong direction and, if possible, have it deleted. At least 50% of the credit reports I have seen in my experience have contained inaccurate information. As a result, one could conclude that the scores in those cases were inaccurate. Had I relied solely on those scores for my decision to work with a particular borrower, I would be wrong half the time. Credit scores serve the secondary sales needs of the capital market players that invest in and service mortgage loans in bulk such as the rating agencies, bond holders, securitizing corporations, (FannieMae, FreddieMac, et al) etc.
Many times, credit scores actually provide a disservice to borrowers and often the brokers and/or processors and underwriters whose job it is to establish the credit-worthiness of an applicant. When evaluating risk many of my investors consider the FICO score only as it pertains to pricing as ultimately, in my opinion, it is not a very strong indicator in predicting the borrower’s future ability to make payments in a timely manner. All loan sellers, including banks, independent mortgage brokers, internet lenders, etc., will be affected by the score when submitting the loan to an underwriter and/or selling the loan in the secondary market. Therefore, I work with the borrowers on their credit prior to submitting the loan to underwriting to obtain the best possible terms and pricing; i.e., interest rate.
Other risk factors are considered in the underwriting process as well. When an underwriter examines a borrower’s risk factors to determine whether or not an approval will be issued they look to the credit score, the documentation type, and the loan amount relative to the purchase price or, “loan-to-value”. Of course, there is a strong emphasis on the appraisal and the strength of the comparable properties used in the appraisal to support the market value of the property. The underwriter looks at the historical credit and the current outstanding obligations. Savings history and assets are important factors as well as the industry that the borrower is in and his/her likelihood of continued success in that chosen field to be of equal significance.
Finally, the character of the borrower is of relevance. Collateral, credit and character of the borrower, combined with the historical and future ability to meet financial obligations, are important to any underwriting decision. Especially if the loan request is “outside the box” of conventional underwriting standards. When selecting a lender/broker, be sure to find one that has a variety of sources for placing loans, including sources that are non-FICO driven, if needed.
For more information, please feel free to call me, Gary Miller, at 505-982-9530. Or, call toll, free, 877-982-9530 if you’re out of the area.
