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Just as experts and finance bloggers alike declare “the credit crunch is over,” out comes a new tool that may actually make it harder for some individuals to secure credit, especially mortgages and home equity loans.
The Fair Isaacs Company, the organization that developed the formula to create the FICO credit score, the score used most widely by lenders, has introduced the FICO 8 mortgage score.
As always, how the FICO 8 mortgage score is derived is a proprietary secret — gleaned from a blend of information about on-time and delinquent payments, your debt-to-available credit ratio, how long you’ve held credit accounts, the types of loans you have, (and how many) and your mortgage history. You can read more about how the regular FICO score is calculated here.
The FICO 8 Mortgage Score still uses a range of 300 to 850 points, just like the original FICO 8 score. But FICO says it offers 15% more accuracy in predicting high-risk mortgage borrowers and people most likely to go into foreclosure.
The score looks at 17 different scoring models, rather than 12 used by the original FICO 8 score.
According to the MyFico.com website, the Mortgage Score looks at dozens of possible mortgage and HELOC (Home Equity Line of Credit) related characteristics, using the most predictive characteristics for the scoring.
This provides lenders with more reason codes they can use to understand the scores — and explain reasons for rejection to prospective lenders. (In theory, putting consumers in a better position to improve their score armed with more information about their credit standing.)
One of the factors considered closely in the new FICO 8 Mortgage Score, according to finance experts, is accounts in serious delinquency — that is, more than 90 days past due. This could be indicative of a danger of defaulting on a mortgage, as well.
How does the New FICO 8 Mortgage Score Affect Homebuyers?
Presumably, it will reduce the odds of people ending up in foreclosure after buying more house than they can reasonably afford, and of course, it reduces the risk to lenders.
Overall, the better assessment methods will benefit those with good credit — and, in a sense, will also benefit those with poor credit. Armed with a better predictive tool, lenders can keep people from making a financial mistake that could result in their losing their newly-purchased homes.
The steps you should take before applying for a mortgage, however, remain the same:
- Pay down as much debt as possible.
- Don’t accrue new debt.
- Don’t open any new accounts.
- Save as much as you can for a down payment
- Get free copies of all three of your credit reports
- Look for errors on the reports and take steps to fix them
- Armed with knowledge about your credit score and credit history, shop around for the best mortgage rate available