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What goes into your credit score?

The most widely accepted and used credit score is computed using a secret formula owned by the Fair Isaac Corp.

Nearly 50 years ago founders Bill Fair and Earl Isaac discovered they could predict how likely a consumer was to miss a payment or default on a loan if they could collect enough information about that person's credit history.

As a result, your FICO score is based on what banks, stores, utility companies and other creditors tell the three major credit reporting agencies about how much you owe and how diligently you pay your bills.

Anyone who's ever had a credit card, auto loan, or even an electric bill in their name, has a credit history with Experian, TransUnion and Equifax. And if you have a credit history, you have a FICO score attached to your file.

The higher the score, the better your credit.

While it's theoretically possible to earn a "perfect" 850, a score above 720 is usually good enough to qualify for the best rates on just about any loan.

Poor Credit

But if your FICO score is below 620, you're in the dreaded subprime category where you'll be charged higher-than-average rates -- if you can get a loan at all.

The most important factors are:

Your score is calculated using 22 different variables from your credit history.

Payment history (35%). You want a long record of paying your bills on time with no missed payments. If you don't pay on time, the length of time payments are past due, the amount that's delinquent, and the number of past due items all affect your score.

How much of your available credit you've used.(30%) The closer you are to your credit limit, the lower your score. FICO begins to penalize you anytime you borrow more than 50% of your available credit.

Length of credit history (15%). Having accounts open for a long time increases your credit score, although inactive accounts don't help as much as active ones. The score looks at how long you've had your oldest account as well as the average age of all your accounts.

New credit (10%). Opening a bunch of new accounts in a short period of time decreases your credit score and makes lenders nervous. Even credit report inquiries (when someone checks your credit history because you're trying to obtain credit) lower your score. Thankfully, inquiries made by employers or lenders sending unsolicited offers don't affect your score. Neither do your requests for your own credit report. FICO also considers a flurry of inquiries from mortgage or auto loan lenders as a single request, so you aren't penalized for seeking multiple bids on a home loan or a vehicle.

Types of credit used (10%). Your score will be a little higher if you have a record of repaying a range of debts, such as credit cards, auto loans and mortgages.

Take special notice of one thing that is not used to calculate your FICO score -- how much money you make. It doesn't matter whether you earn $10,000 or $10 million a year. Income is not a factor.

 

ANALYZING THE BORROWER'S CREDIT

Traditional Credit Reports.

Credit reports submitted with each loan must contain all credit available in the accessed repositories. They also must provide an account of all credit, residence history, and public records information available in the credit repositories of each borrower responsible for the mortgage debt. The minimum credit report required by FHA is a "three repository merged" credit report (TRMCR).

Non-Traditional Credit Reports.

A Non-Traditional Mortgage Credit Report (NTMCR) is designed to assess the credit history of a borrower without the types of trade references normally appearing on a traditional credit report. It can be used either as a substitute for a TRMCR or an RMCR for a borrower without a credit history with traditional credit grantors or as a supplement to a traditional credit report having an insufficient number of trade items reported.

When analyzing a borrower's credit history, examine the overall pattern of credit behavior, rather than isolated occurrences of unsatisfactory or slow payments. A period of financial difficulty in the past does not necessarily make the risk unacceptable.

Collections and Judgments.

Court-ordered judgments must be paid off before the mortgage loan is eligible for FHA insurance endorsement. (An exception may be made if the borrower has agreed with the creditor to make regular and timely payments on the judgment and documentation is provided that the payments have been made in accordance with the agreement.) FHA does not require that collection accounts be paid off as a condition of mortgage approval. Collections and judgments indicate a borrower's regard for credit obligations and must be considered in the analysis of creditworthiness with the lender documenting its reasons for approving a mortgage where the borrower has collection accounts or judgments. The borrower must explain in writing all collections and judgments.

Previous Mortgage Foreclosure.

A borrower whose previous principal residence or other real property was foreclosed or has given a deed-in-lieu of foreclosure within the previous three years is generally not eligible for a new FHA-insured mortgage. However, if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the borrower and the borrower has re-established good credit since the foreclosure, the lender may grant an exception to the three-year requirement.

Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage provided the lender documents that one year of the payout period under the bankruptcy has elapsed and the borrower's payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive permission from the court to enter into the mortgage transaction

• Chargeoffs and collections and exceeding $2500 will need to be paid off unless file has an approved automated finding
• For loans that have received a DU/LP approval the findings will determine the way collections are examined and resolved
• Judgements must be paid in full

Compatible with industry requirements on:

• Appraisal and repair
• Closing costs
• Lender insurance
• Automated Underwriting Systems (AUS) using FHA's TOTAL Scorecard
• Similar documentation for comparable products