Getting a mortgage: The hows and whys of credit scoring

The Birmingham News, promotions By The Birmingham News, promotions
on September 26, 2010 at 10:47 AM

By Jean M. McLean

Special assignments writer 

   Try to remember your statistics class, when your teacher explained how experts figure the odds of something very specific happening within a set amount of time.

   That’s the basic premise behind how lenders use credit scores, said Charlton Bargeron, vice president of Red Mountain Bank. There are three credit bureaus commonly used by lenders in the U.S. – TransUnion, Equifax and Experian. Those credit bureaus use an individual’s past payment histories, the amount of his or her outstanding debt and other information they glean from creditors to figure the odds of an applicant defaulting on a loan. 

   Those odds are based on random samples each of the bureaus includes in their studies. They may have found that if a person has x amount of outstanding credit with x amount of income, for instance, and have paid x percentage of their bills late, they are likely to default x amount of the time.

   But each bureau’s formula is different from its competition. All three formulas are carefully guarded, and even lenders are not privy to how they figure default risk. Those variances, along with differences in information gathering, can mean the scores can either vary widely or be within 10 to 20 points of each other, Bargeron said. 

   One thing is always true: higher numbers mean better ratings. Better ratings mean a buyer is less likely to default on his or her loan. That means a higher-rated buyer not only qualifies for a loan, but can often get lower interest rates, saving thousands of dollars over the life of the loan. 

   “The higher the score, the lower the cost of the loan,” said Rick Britnell, vice president of consumer lending for America’s First Federal Credit Union.

   What is considered a “good” credit score? Mortgage-worthy credit scores have varied within the past several years. In the current market, those scoring less than 740 can “start getting dinged on a rate,” said Bargeron. 

   The length of the loan (15 years versus 30 years) isn’t a factor, though the loan-to-value, or your down payment, is a factor. If you have more of your own money in the house you are statistically less likely to default. It is also more likely that, with less of their money tied up, the lending institution can get its investment back on a foreclosure sale.

   One reason credit bureaus differ in their results is that they don’t all gather the same information. That’s why mortgage lenders usually average scores from all three bureaus, said Britnell.

   “But these scores can change daily,” said Bargeron. That’s why it’s vital for home buyers to talk with a lender before they shop for a home. They should not only find out what their credit score is now, but how to keep it from going lower. 

    Since lenders don’t know the formulas used within the bureaus’ statistics, they can’t always advise buyers on what they must do to pull their credit scores up. 

However, there are some things they do know that affect credit. Here are their best tips on how to keep a credit score from dipping when you want to buy a home:

•   Monitor your “revolving credit.” That includes retailer cards, the types that offer you discounts if you open an account at the register. Bureaus closely watch how much credit is drawn to the available balance, both on retailer and traditional bank credit cards. Even if you pay off your bills monthly, keeping a high balance ($8,000 charged with a $10,000 limit, for example) can lower your score.

•   Don’t close out accounts if you have outstanding debt on other cards. It could affect your available balance ratio. Talk to a lender before making any changes.

•   Avoid store credit, such as 90 days same-as-cash when preparing to buy a home. Even if you intend to pay it off promptly, it extends your obligations, and can therefore lower your score.

•   Get your credit cards paid down.

•    If you plan to finance a home and don’t have credit, get a credit card, use it for a small purchase, and then pay it off, keeping the account open.

   More advice is available from the Federal Trade Commission. Log onto and click on “consumer information” to learn more about credit and home mortgages, including tips on how to build a better credit rating.