Mortgage Borrowers Face Tougher Credit Scoring

Most mortgage applicants are familiar with the requirement for an acceptable credit history to receive home loan financing.


But in the wake of recent woes involving some subprime borrowers who were unable to make scheduled payments on time, lenders are now taking a closer look at the credit rating of all customers.

One of the government-sponsored enterprises (GSEs) which buys or guarantees almost 20 percent of the residential loans made in the United States announced this month it will impose an extra fee starting next March on loans where borrowers do not possess a very good credit history.

While the dividing line between good credit and bad credit remains a FICO score of 620, as computed using proprietary probability modeling licensed by Fair Isaac Corporation, the new standard for the best mortgage rates will become a minimum score of 680.

Since each of the three major national credit bureaus reports a unique FICO-based score on an individual borrower and since many loan applications have two borrowers, the score which is utilized to determine the cutoff is the middle score of the applicant with the lowest middle score.

The new 680 cutoff for the best rates will not apply if the borrowers are making a down-payment of at least 30 percent on a single-family home purchase, or have 30 percent equity based upon a new appraisal when a refinance transaction is involved.

Since the new rule is applicable only to loans closed, funded and delivered to the GSE on or after March 1, those who do not meet the 680 FICO credit score standard should move immediately to purchase or refinance after meeting with their trusted local mortgage professional to determine their status.

For those who wait until next year, the penalty rate on many 30-year conforming fixed-rate mortgages will be computed on a sliding scale.

If the "cutoff" FICO score is between 660 and 679, borrowers can expect their fixed rate to be approximately one-quarter percent higher. If the score is between 640 and 659, the rate may be three-eighths higher and if the score is between 620 and 639, the rate may be half a percent higher than is currently the case.

The actual fixed-rate penalty may be higher or lower, depending upon mortgage market conditions. The fee will not apply to 15-year fixed-rate mortgages, FHA or VA mortgages or certain specialized program loans. In some cases, your local mortgage professional may be able to utilize another financing conduit to avoid the new penalty.

If you are not in a position to purchase or refinance now, there are some steps you can take to improve your credit score or avoid causing it to decline below the penalty level.

The first step is to figure out what your cutoff score is now. Do not attempt to do this yourself without professional assistance. The reason: many Web sites will provide you with a score which has not been calculated utilizing the methodology acceptable to the mortgage industry.

Furthermore, you need all three FICO scores from the three national credit bureaus utilized by your lender. Therefore, the simplest approach is to meet with your trusted mortgage originator to give you the answers you require.

The other cardinal rule of maintaining or creating an excellent credit rating is to pay your bills on time. Do not allow any of your payments to be posted to your accounts 30 days or more late. This is accomplished by automating as many payments as possible and utilizing the Internet to make payment to avoid lost or delayed mail handling.

The priority order of payments is mortgage and installment debts (including student and car loans) followed by revolving debt. Do not apply for new credit until you know your cutoff score.

The key is to be an informed consumer. With the early warning information presented here, you may be able to save a considerable amount of money on your next home loan if you act now.

As we move into the new week, here are what some key indicators are telling us. A plus (+) sign means the category is on the side of lower interest rates; a minus (-) sign means the forecast is for higher rates.

Key Indicators:

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