Credit Scores versus Low Interest Rates

Many consumers applying for a mortgage are going to start sharing more personal information with lenders next year, like it or not. FICO scores, the industry standard for determining credit risk in mortgages backed by Fannie Mae, Freddie Mac and the Federal Housing Administration, largely have been based on a person's credit history. But in an attempt to develop a more well-rounded picture of a person's finances beyond credit, tools are being developed to help the lending industry dig deeper. Fair Isaac Corp., or FICO, the company behind the widely used scoring formula announced a separate score that will be available to mortgage lenders and incorporates information that will include payday loans, evictions and child support payments. In the future, information on the status of utility, rent and cell phone payments may also be included. Separately, last month, the big three credit reporting agencies, Experian, Equifax and TransUnion, began providing estimates of consumer income as a credit report option. And earlier this year, Experian began including data on on-time rental payments in its reports.




The new information could prove to be a double-edged sword for consumers: It may open the door to homeownership to some consumers who have, according to industryspeak, a "thin file" or worse, a "no-file," meaning they lack sufficient credit histories. On the other hand, the extra information may make a borderline borrower look even worse on paper. And it's unlikely to quiet critics who complain that too much emphasis is put on a single number. It may expand the universe of people who can get a mortgages.


FICO scores have been around since the 1950s, but they didn't become a major factor in mortgage lending until 1995, when Fannie Mae and Freddie Mac began recommending their use to help determine a mortgage borrower's creditworthiness. The score, which ranges from 300 to 850, factors in how long borrowers have had credit, how they're using it and repaying it, and if they have any judgments or delinquencies logged against them. The change comes at a time when the average FICO scores of homebuyers who qualify for loans continue to rise, as mortgage lenders reward the most creditworthy borrowers with low rates and tack extra fees onto loans for those with lower credit scores. The extra information may also help more affluent homeowners who aren't on the credit grid. Residential lenders are open for business. Money's almost free; it's extraordinary.