Mortgage University:
Credit Scores
by Craig Goebbel
President & CEO, LoanTek, Inc.

Credit scores are the mortgage industry’s biggest mystery – for both lenders and borrowers.

Many times we’ve been asked, “How are they determined?” There are several factors and the exact calculating method is unavailable, but we do know the primary considerations.

Your payment history is a big factor. How you paid your bills in the past is considered a strong indication of how you will pay them in the future. If you have a record of late payments this lowers your score.

Outstanding debt is another factor. A person who has accounts with low balances and high available credit will likely score higher than a person who has the same number of accounts, but has low available credit on them. Even if both people have perfect payment records the person with the lower balances will score higher.

Next is credit history. This one is simple. Someone who has a ten-year history of perfect credit will score higher than a person with a two-year perfect history.

Many consumers are concerned about credit inquiries and believe recent inquiries will lower their score. This is not always true. According to Fannie Mae, credit scoring is not affected by auto or mortgage loan inquiries, which occur in a 30-day period prior to the score being calculated. Auto and mortgage inquiries that occur within a 14-day period are always considered as one inquiry. However, any other numerous inquires will lower your score.

Credit scores can range from 300 to 900. Fannie Mae and Freddie Mac claim that all scores are considered for loan approval. Ask any lender and they will tell you any score below 680 is harder to approve and scores under 620 are rarely approved for standard Fannie Mae/Freddie Mac pricing. We have had success getting clients Fannie/Freddie conforming loans with scores under 600, but it was not easy.

Sub-Prime Loans

What is a sub-prime loan? It is any loan that does not meet Fannie Mae-Freddie Mac underwriting criteria. Are they bad loans? No. Most of these loans are viable alternatives to conforming loans with similar rates and fees. However, the sub-prime loan market is a breeding ground for “predatory lending” practices. Predatory lending refers to mortgage lenders who strip a homeowner’s equity through illegal or unethical practices.

So shop carefully, do your homework and get fully informed about where you stand (from the credit viewpoint) before you commit to a loan. Always, always make certain the closing costs at the closing table are the same as disclosed on your written Good Faith Estimate.

© 1999 - 2004 LoanTek

Craig Goebbel is President and CEO of LoanTek.com, mortgage loan brokerage.  He is also producer and host of Real Estate Radio Show, a Seattle-based talk show featuring mortgage and real estate news, interviews and listener calls. It is broadcast on KVI Radio AM 570 in Seattle, Washington. Past show are also webcast via the Internet at http://www.realestateradio.net.

Real Estate Radio Sponsor

Real Estate Radio with Goebbel and Gray is the leading real estate radio talk show in the world and is hosted by Real Estate home mortgage expert Craig Goebbel, owner of LoanTek Home Loans and Robb Gray of John L. Scott Real Estate.