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Credit Scoring in the Mortgage Industry

Three years ago, credit scoring had little to do with mortgage lending . When reviewing the credit worthiness of a borrower, an underwriter would make a subjective decision based on past payment history.

Then things changed.

Lenders studied the relationship between credit scores and mortgage delinquencies. There was a definite relationship. Almost half of those borrowers with FICO scores below 550 became ninety days delinquent at least once during their mortgage. On the other hand, only two out of every 10,000 borrowers with FICO scores above eight hundred became delinquent.

So lenders began to take a closer look at FICO scores and this is what they found out.   The chart below shows the likelihood of a ninety day delinquency for specific FICO scores.

Imagine a busy lending office and a loan officer has just ordered a credit report. He hears the whir of the laser printer and he knows the pages of the credit report are going to start spitting out in just a second. There is a moment of tension in the air. He watches the pages stack up in the collection tray, but he waits to pick them up until all of the pages are finished printing. He waits because FICO scores are located at the end of the report. Previously, he would have probably picked them up as they came off. A FICO above 700 will evoke a smile, then a grin, perhaps a shout and a "victory" style arm pump in the air. A score below 600 will definitely result in a frown, a furrowed brow, and concern.