Monday, June 07, 2010

What's Your FICO Score Really Worth?

In today's market, personal credit scores are being skewed by a decline in average FICO® scores. Why should you care?

Well, if you are intending to get into debt responsibly in the coming year your FICO score is still the number one criteria your lender will use to determine your likelihood of paying them back. It's also one of the chief pricing factors to getting the best interest rate. That said, things are changing at a rapid pace. The newly minted FICO models are supposedly taking less consideration for small things like parking tickets but the really big defaults for big items like mortgages and car loans will weigh even more heavily as a result. 

All defaults have less effect on your score as time goes on. With improved history that is! So it stands to reason that if more homeowners take the 'walkaway' option the impact will be figured into the score models for that particular historical period of consumer behavior. Essentially scoring models are averages of 'good behavior'. You will notice that each Bureau has their own priority list for what is most important (to their model) and this can certainly change, which is why you have three different scores.  

According to the FICO experts at Fair Issac Company, the inventors of the FICO scoring system: a 100 point difference in your middle credit score could mean over $40,000 extra in interest payments over the life of a 30 year mortgage on a $300,000 home loan. 90% of the largest banks use your FICO® score for credit decisions. Which means 10% don't: Portfolio Lenders, some Credit Unions, Sellers and Rich Uncles don't take your credit score into consideration as their chief determining factor - at least not officially.

Rethink that 'walkaway' or other default. A foreclosure, deed in lieu or other late mortgage payment of more than 120 days  can have up to 130 -200 pts immediate negative effect on your score. Even one point below 740 can cost you a higher mortgage rate. While the effect on your score lessens over time with good behavior, the main issue such defaults present is the ability to obtain other credit, notably absolute no go periods imposed by FHA, Fannie Mae, Freddie Mac and most sane lenders. Even FHA wants to see 3 years clean credit after any major default period. And we mean clean. No 'lates' at all during that time frame. Your underwriter WILL check your rental history and they WILL check every rental landlord for the previous two year period especially if you have had a default or your score is borderline.

Conventional lenders take a hard line: Fannie Mae recently announced the new guidelines may require up to 8 years good credit history required before they will fund a conventional loan to someone who walked away from their mortgage. Traditionally a foreclosure stays on your credit report for 10 years. Bankruptcies usually fall off around 5-7 years depending on the type. Again, FHA has been more lenient to date but there are certainly other means to buy a home.

Creative financing options: So many sellers are in the game now -- you could consider a Lease/Option for a few years or Seller Financing. So really, the barriers to traditional home ownership for those with default histories suggests you find another way around your situation. And if enough people find more creative means...the banks might have to give a little! 

Get legal advice!  If you go for a seller contract on a home purchase or lease option, please be SURE and get legal advice on your Purchase and Sale contract by a neutral third party real estate attorney who is knowledgeable in this arena in your state. Seriously. We all love our Realtors and our sellers but you just can't be too informed when it comes to signing a contract for your home purchase.

All the best!

© 2009 susan templeton