Don't Score Yourself
by David Reed

It's crazy that I still get these calls, but it actually seems as if I'm getting more of them as time goes on. The question? "What credit score do I need to qualify for a mortgage loan?" Or its sister statement, "I can't qualify for a loan because my credit score is too low."

First, I'm not talking about sub-prime mortgages here. With a low score and a little (or no) pocket change most anyone can get financing for a home. No, I'm talking about run-of-the mill conventional loans; Fannie Mae and Freddie Mac loans. Loans that take up the greatest share of mortgages made in the United States.

Credit scoring for mortgages started in the mid to late 90's and now uses the model fashioned by Fair, Isaacs Corporation, or FICO. These numbers, which reflect poor, average or great credit histories are numerical milestones lenders use to help approve a loan. But what they do not do is approve or deny a conforming or conventional loan simply due to the FICO number. There is no "required" credit score for these loans. Credit scores are used, but not by themselves. Other factors that contribute to a loan approval can be more downpayment, good cash reserves or debt ratios below guidelines.

Okay, okay. There are certain variations of these themes that will ask for a minimum credit score but typically such requirements are for "boutique" loans that vary from the standard conventional fare such as 100 percent financing or "stated income" mortgages. But all in all, scores don't approve nor decline.

Secondly, and maybe most important, is that some borrowers don't apply for a mortgage at all because they find their credit score is below 600 and think they'll get a much higher rate. Again, on conventional conforming loans credit scores don't dictate an interest rate. Only when applicants are indeed considered "sub prime" are rates adjusted due to overall credit quality. But on a standard 20 percent down mortgage, borrowers with 580 credit scores can be eligible for the same rates as those with rates in the high 700 range. Really. There is a thing called "risk based pricing" that a lender might charge more because of a score but if you find a lender that prices loans that way and you don't feel you deserve it then find another lender.

Just yesterday we had a potential client that wanted to refinance her loan, she applied with us and got approved. Her scores were in the low 640's but we still got her a great rate. Her upside? She had nearly 50 percent equity in her house. Another lender, and here's what steams me, had quoted her a rate of 6.45 percent with 3 points and if she improved her credit score over the next two years the lender would automatically reduce her rate to 5.99 percent. This was from one of the biggest lenders in the country. Yesterday she locked with us at 5 7/8 percent with no points. I'm in no way bragging about my rates; my rates are pretty much like everyone else's. But what in the world would justify charging someone a higher rate just because of her score? Isn't she more likely to make her payments on time with a 5 7/8 percent quote instead of 6.45 percent? With 3 points? Sheesh.

At my desk right now there are two loans, one with a 581 credit score and another with a 626 credit score. Both are getting my best rates reserved for those with 800 scores or above. And my best rates can compete with anyone in the market.

Credit scores are a wonderful thing. I love them. They make my job easier. But they can also be both misunderstood and misapplied. Don't judge yourself because of a score. That can get expensive.

Published: September 10, 2004