2022 Boise Idaho Real Estate Blog

Credit Scoring Part I -- Good Credit Means Lower Interest Rates

Main Boise Home Loans

This is the first in a four part series on credit scoring. With the recent sub-prime mortgage fallout and credit crisis we are experiencing, your credit score now is more important than it has ever been! These blog entries will explain to you what you need to know to make sure your credit situation is in top shape.

In the 1960s, Fair Isaac Corporation started working on a system that lenders could use to evaluate the likelihood of receiving repayment on loans. Prior to that, it was really a matter of trusting an individual to be a "man of his word," so to speak. Fair Isaac sought to take human error out of the equation with a reliable system that could determine whether or not consumers were truly worthy of credit, and thus FICO was born. This evolved to become the standard for lenders by the 1980s.

Credit scoring has an enormous impact on a borrower's ability to purchase a home. It can mean the difference between getting a good interest rate and the home of their dreams, or whether they even qualify at all. For this reason, it is important for borrowers to understand the credit scoring process, and to know what their credit score is when they look to obtain mortgage financing.

What the credit scoring model seeks to quantify is how likely the consumer is to pay off their debt without being more than 90 days late on a payment at any time in the future. Credit scores can range between a low score of 350 and a high of 850. The higher the client's score is, the less likely they are to default on their loan. Only a rare one out of approximately 1300 people in the United States has a credit score of above 800. These are the slam dunk clients that walk away with the best interest rates. On the other hand, one out of eight prospective home buyers are faced with the possibility that they may not qualify for the loan they want because they have a lower score between 500 and 600. Here is a sample chart that illustrates how an underwriter interprets the score in terms of risk, and how the interest rate is affected.

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Posted by Eric Leigh at 9/17/2007 3:25:00 PM

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