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Thursday, March 27, 2008

LoanShark Confesses: I Can't Pull A Credit Score From A Hat

Ever since most major lenders tightened credit standards, my job got harder. Borrowers used to need to have a 680 credit score to qualify them for the best rates. Now it's 700. Anything lower and you can't get a non-conforming loan. Clients ask if one 30-day late payment will be detrimental enough to disqualify them from getting the best rate. Or does it take one 60-day late? Or three 30-day lates along with a high debt-to-credit ratio?

I wish I knew. A FICO score, which can range from the 300s to 900 (although I've never seen one that high) is based on a complicated proprietary formula nobody has cracked. Believe me, I've tried. I've seen people with a lot of lates and they have a score of 720. I've seen somebody who had one late and it brought him down to 600.

I tell clients to get a copy of their credit reports ASAP (get all three because we get all three, every time, and we will use the middle score to qualify you). I tell people if they see anything at all negative on the report, be proactive. Contact the creditor to ask to have the negative information removed (in my experience, it's a lot easier to get a late car payment removed than a late mortgage payment). It's better to write a letter than to phone, and attach copies of your bank statements showing the payment was made.

It's worth the trouble. On a $300,000 loan, here's what you could save:

FICO® score APR Monthly payment
760-850 5.600% $1,722
700-759 5.822% $1,764
660-699 6.106% $1,819
620-659 6.916% $1,979
580-619 9.220% $2,461
500-579 10.242% $2,686