For years, creditors have used various scoring systems to help automate and evaluate applicants' credit reports and general ability to repay the requested credit. The mortgage industry endorsed and adopted a statistical scoring model developed by the Fair Isaac Corporation. The "FICO" score, as it is widely known, is used by most lenders to help gauge the risk of future default by prospective loan applicants.
This statistical model attempts to predict risk by focusing on a borrower’s repayment pattern with existing and previous creditors, the length of a borrower’s credit history, the total amount of credit the borrower has access to and is using, and whether the borrower is actively searching for additional credit, i.e. "Inquiries" - notations of companies who access your credit file. The weighting of the various "predictive characteristics" was developed through study of a large sample of mortgagor payment records over a long period of time and the algorithm continues to evolve as more and more records are analyzed.
The result? After the program churns though your credit file, your FICO score is computed. The number ranges from 300 to 850 (the higher the number, the lower the predicted risk). Because people are accustomed to letter grades, like a report card, FICO score ranges are often referred by their letter "grade" equivalent. For example: 760+ = A++, 740 - 760 = A+, 720 - 740 = A, 680 - 720 = B+, 660 - 680 = B, 620 - 660 = B-. Some lenders vary their definitions, but generally speaking, a score greater than 620 is good enough to qualify for any conventional loan. Depending upon the down payment, scores above 740 will qualify for the best rates and above 760 for the lowest mortgage insurance cost, if applicable.
Applicants being graded B, C, or D, generally speaking, will be offered fewer options, with larger down payment requirements and higher interest rates and/or closing costs. However, there may be more options with less costs for certain types of buyers who qualify for certain types of loan programs, i.e. first-time home buyers and buyers who are veterans.
Having your credit report ordered (with FICO scores) and reviewed by a professional Mortgage Broker during the prequalification stage, i.e. up front, will provide you with the correct, mortgage-related credit score which the lender’s underwriter will use for evaluation. Knowing this score up front means less uncertainty for you and means that your Broker can provide the most relevant and best mortgage program options for your consideration.
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