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by kpanchuk on 11/19/12

 

Mortgage lending keeps getting tighter.

Case in point, the average FICO score on closed, first-lien loans hit 750 in October, which is up from 741 last August, Ellie Mae said.

Ellie Mae analyzes data on loan applications that pass through its Encompass360 mortgage software. While that data only accounts for 20% of all originations, it gives a snapshot of what types of loans are being accepted and closed, as well as denied.

Furthermore, the credit score on denied applications also rose from a year ago, suggesting credit standards actually tightened during the same period.

The average FICO on denied applications hit 706 in October of 2012, which is up from 700 in October of 2011 and 697 in September of 2011.

The loan-to-value ratio on average closed loans hovered at 78 last month, up from 76 in October of last year.

On denied applications, the average LTV hit 87 in October, up from 82 in August of 2011.

The closing rate, on the other hand, seemed to improve over the same period, hitting 54.5% in October, up from 47.1% in November of 2011.

The idea that lending is now overly restrictive and only available to the highest quality borrowers is certainly not new to the marketplace. In recent public statements, Federal Reserve Board Chairman Ben Bernanke indicated that an overcorrection is now taking place.

kpanchuk@housingwire.com

 

by Mike on November 5, 2012

Your credit score is important. Very important. That three-digit figure is so influential that it determines your eligibility for credit cards, home and auto loans, student loans, apartment rentals and even some jobs. It’s vital to know your credit score range so you can decide which loans to apply for, know when you’re settling for less than you could get and, if necessary, take steps to rehabilitate your FICO score.

Your credit score gives lenders an idea of whether they can rely on you to pay back your debts. It follows that your credit history, past and present, is among the data that credit bureaus use to calculate your score. If you’d like to get a grip on your score’s implications, read on: the nerds will clarify the finer points.

Lower score, higher interest

More than determining your eligibility for a loan, your score affects the cost to you, too. In fact, the score and the interest you pay are inversely proportional, roughly at a one-to-one ratio. So, as you boost your score, your monthly payments will generally decrease at the same rate.

Let’s say you want to get some new wheels. To finance your slick new ride, you take out a 60-month fixed-rate auto loan of $15,000.  If your score is in the gutter, say a 610, you’d pay $357 a month, according to myFICO.com. The guy next to you in the lot, with the Ray Bans on, has a superb score of 800. His score is about 30% better than yours—31.15% better, to be precise—as his monthly payment, at just $277, a 28.88% markdown.

It’s clear that you’d rather be that other guy, who pays on time and keeps his debts low.  Because once you start digging yourself a hole with late payments, it becomes harder to climb out, with the high rates weighing you down.

Understand your FICO score

The breakdown of credit score ranges is as follows:

<630: Bad credit

You likely landed her because of bankruptcy, or because you’ve missed payments consistently—or, as is often the case with younger folks, you have no credit history at all. You’ll face higher interest rates and fees, and your choice of credit card is restricted. If you find yourself in this bracket and still want a credit card, a secured card is likely your best bet.

630-689: Fair (average) credit

Your score is average, and it’s probably because you have too much “bad” debt. If you’re holding onto some credit card debt or if your balance often grazes your credit limit, bureaus won’t trust you, and therefore lenders won’t either.

690-719: Good credit

Your rates are low, and you can choose from most cards, including those that earn rewards.

720-850: Excellent

If you’re in this bracket, take a look at cards with great fringe benefits. American Express, for example, offers premium cards that better accommodate the ritzy life.

Although these four categories are the standard, credit scores are still somewhat fluid, especially since the recession began. Since 2007, scores’ effect on consumers has become more severe, too, according to Paul Oster, the CEO of Better Qualified, LLC, which specializes in business and consumer credit services. “The impact of scores has changed dramatically,” Oster wrote in an e-mail. “Consumer’s credit scores can cost or save them hundreds of dollars a month.  The ‘magic number’ has been increasing since the ‘R’ [the recession].

I know that 5 years ago 620 was a good benchmark, then it went to 640, 680, 720, and now 740. The average credit score is around a 685. Remember that scores are fluid and changing all the time. Studies show that individuals with an average credit score would reduce card finance charges by $76 annually if they raised their score by 30 points.”

For more detail on each bracket and more information about credit reports and safe credit practices, check out another of our articles.

3) The future of your score: the Consumer Financial Protection Bureau and you

Although scores generally follow the pattern above, the system can be a bit more complicated. The reason being that there isn’t one federal standard for a score.  Rather, credit scores are a business, and FICO is simply the biggest in the field. “The credit bureaus are privately held, for profit companies, that are loosely regulated by the FTC,” Oster said.

It follows that your credit score is sometimes tough to pin down. Although lenders will most often work with FICO, they may also use scores by Vantage, CreditPlus, and more. Some of these scores even break from the standard 300-850 scale. The VantageScore, for example, uses a range of 501 to 900.  Your score might be different from one bureau to another not only because of a unique range but also because each agency uses a unique model for each credit product. Some agencies may weigh one variable more heavily than others.

This variability and the lack of transparency provoked the federal government to act. Last year, the Consumer Financial Protection Bureau opened its doors to make credit less opaque to consumers.

Lately, the Bureau has been conducting a study of the range and variability of different credit scores. The group is concerned that a consumer might apply for a loan he or she reasonably expects to receive—given one particular credit score—and then be denied—because of another score—therefore wasting time and money in the process.

The Dodd-Frank Act of 2010, too, is doing its best to make credit scores more transparent. The Act requires that lenders provide scores to consumers whenever they use a risk-based pricing model—the model that determines your interest or insurance rate.

Still, for most, there’s no need to panic. The variability, while there, likely affects a very particular group of consumers, those who generally straddle two brackets. Regardless of the scoring system, the same general principles apply: pay on time and keep your balances low.