Credit Grading

Credit scoring has been around since the 50's.Today the use of credit scores has become increasingly important in obtaining any type of loan. When financing a house, a car or even obtaining a credit card, credit bureau scoring is a scientific way of assessing how likely a borrower is to repay a loan.

Each of the three major credit reporting agencies utilize the same scoring models developed by the California based company Fair Isaac Company (FICO), yet each company can give you a different score. Each of the bureaus believes some credit characteristics to be more important than others.

Credit scores can range form a low of 0 (no credit score) to over 800. Many people believe that credit scores are only based on whether or not you pay your bills on time. Scores are actually based on a complex system analyzing different characteristics of your credit, such as:

1. Payment history, including any collections, judgments, foreclosures and/or bankruptcies.
2. The number of inquiries into your credit report in the past 6-12 months. A large number of inquiries can indicate that you have been trying to obtain too much credit too quickly.
3. The amount of outstanding balances compared to your available credit limits. A borrower with $4,995 on credit cards and loans with $5,000 in credit limits will be penalized. Even if the payment history has been perfect.
4. How long accounts have been open. The longer that you have had good credit the better.

These are only a few of the over 30 different factors used in determining your score. None of the 3 major bureaus have been required to divulge their formula for determining these scores. However, they must still abide by the Fair Credit Reporting Act and they do not consider the following:

1. National origin, race, marital status, gender and religion.
2. The amount of money you might have in the bank.

Banks and lenders are not required to disclose your credit score to you.

If your credit score is low, there are no quick fixes. But there are some things to keep in mind when trying to maintain a high credit score:

1. Periodically keep tabs on your credit report for inaccuracies. You can obtain a copy from each of the Major Credit Reporting agencies. Reports are usually free, but can cost as much as $8.00.
2. Pay all your bills on time.
3. Use credit wisely. Use only the credit you need and can afford to pay.
4. Don't max out your credit cards.
5. Don't apply for or open many credit accounts in a short period of time.
6. Don't try to change a score overnight by suddenly closing or opening accounts. This could backfire.

Remember, a low credit score does not mean you will not be able to obtain a loan. Credit scoring is just one part of the process. It is important, but so are things like your employment history, your savings pattern, and your down payment.

Below are links to information regarding credit and credit scoring.

Fannie Mae - www.fanniemae.com  Freddie Mac - www.freddiemac.com  Fair Credit Reporting Act - www.ftc.gov  For more information about Credit Reporting Agencies you can contact them directly. Equifax 800-685-1111 www.equifax.com       Experian 888-397-3742 www.experian.com   Trans Union 800-916-8800 www.transunion.com  

What is "A+" credit, "A credit", "B" credit, "C" credit, and "D" credit? Not all "A's" are the same, likewise for the other grades.

Every lender has their own interpretation of the credit grade of an "A", "B", "C", or "D" borrower. To most lenders of those advertised low interest rates, they want the A+ borrower, with credit scores above 650, and usually the best rates go the those at scores of 700 or above.

THE BASICS: (once you have passed the credit score test) All LTV's mentioned are for Single Family Owner Occupied Residences. Please keep in mind that there are several computer programs and grading engines that determine credit grades, and all don't use the same criteria.

(A+) 

A grade of A+, means the borrower almost walks on water. No late payments on any mortgage loan or rent payment in the last 3 years. No 30 day late payments on your consumer credit. Late payments mean 30 days or more late, not 16 to 30 days late and a late fee was charged. Mortgage of less than 30 days late are not counted.) No bankruptcies in the last 4 years to 7 years.

No 60 day late payments allowed on the mortgage or consumer credit. No adverse credit, NO Bankruptcies in the last 5 to 7 years, and NO FORECLOSURES.

An "A+" grade will get you a loan of up to usually 97% loan-to-value, sometimes 100%, depending on the lender. PMI is required on most loans above 80% LTV. Generally, no cash-out above 80% loan-to-value. Cash-out includes paying off credit cards.

(A) 

Grades of "A" or "A-", depending on the lender. Anything less than "A+" doesn't get the low interest rates advertised in the media. In some cases, one 30 day late is allowed on a mortgage or rent payment for an "A". Two 30 day late payments may be allowed on a combination of several mortgages.

An "A" or "A-" grade may get you a loan of up to 100% LTV. No PMI is required. Cash-out is allowed at any LTV, even 100%. Usually a down payment of at least 5% is usually required on purchases.

(B) 

Grades of "B+" to "B-", some lenders even call a "B+" an "A-" grade and a "B-" can be someone else's "C+". This area can allow 30 day late mortgage payments of up the 4 times in the last 12 months, or one in the last 60 days for the same time period. The consumer credit can have 60 day late payment or even 90 day late payments. Sometimes the consumer payments can be all bad. Adverse credit is allowed. A bankruptcy or foreclosure in the last 2 years may be allowed. Some lenders may allow up to 12 late payments in a row, called rolling late payments, and only count it a single 30 day late payment.

No 60 day late payments allowed on the mortgage. A 60 day late may be allowed on consumer credit, if a single, isolated occurrence and there are no other late payments shown. Limited adverse credit, No bankruptcies in the last 2 or 3 years, and No foreclosures in the last 3 years.

A "B" grade may get you a LTV of up to 90%, possibly even 100%. A down payment of at least 5% is usually required on purchases.

(C) 

Grades of "C+" to "C-" is a "B-" to some down to a "D" to others. It's a 60 day late payment or 2 up to a 90 day late payment on the mortgage or rent. No consumer credit at all or all bad credit payments or all adverse credit. A Chapter 7 Bankruptcy discharged/dismissed in the last 2 years or a Chapter 13 discharged in the last 12 months. A foreclosure in the last 12 months is allowed.

A "C" grade may get you a LTV of up to 80%, sometimes even 85%. You may still only be required to have 5% as a down payment.

(D)

Not the end of the world. Grades of up to "C-" by some, don't get lower than "D". Late payments of 90 days or more on the mortgage or rent. The property could even be in foreclosure with only a 60 day late showing on the mortgage. Nothing but poor credit all around. Chapter 7 bankruptcy of 12 months, or less, or still in Chapter 11 bankruptcy. Bankruptcies must be discharged or dismissed prior to completing a new loan. A foreclosure in the last 12 months is allowed at this grade, by some lenders.

A "D" borrower may get up to 75% LTV, and may be required to have up to 10% down payment. There are different levels of "D". To most lenders, a true "D" borrower can only get limited cash-out, if any. The LTV ranges from 60% to 75%.

THE BOTTOM LINE: The grade is not the thing that's important, it's how much can you borrow based on your credit history. The LTV (loan-to-value) is the driving force in real estate transactions. Not the RATE, not fixed ~vs.~ adjustable, but how much house with little or no money down can you afford. How much lendable equity to pay off bills and/or lower your out of pocket expenses. 

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