Washington -- Scoring in the high 600s or better on your Scholastic Assessment Tests (SAT) may be a good route into a top university. But if you plan to buy or refinance a home from this summer onward, you may want to rack up at least a 660 on your FICO score when you apply for a mortgage.
In fact, a 700 to 800 will help your application breeze through your lender's underwriting process with minimal hassles.
What's going on here? What's a FICO score? And why might it affect your next mortgage application? The answers come from Freddie Mac -- the Federal Home Loan Mortgage Corp. -- which issued a milestone directive July 11 to all its lenders nationwide. Freddie Mac is one of the two largest sources of home mortgage money in the country. Fannie Mae is the other. Every year, Freddie Mac buys billions of dollars' worth of newly minted loans from lenders active in virtually every community.
To banks, mortgage bankers, thrifts and other firms with whom it does business, Freddie Mac's words about what it will and will not buy carry almost Moses-like force. And July 11 the words went out from Freddie: We strongly recommend that henceforth anyone who wants to sell loans to us use credit scores to evaluate consumers' applications. The reason, said the giant corporation, is that after extensive research on hundreds of thousands of loan files, it has concluded that there is a "strong correlation" between borrowers' repayment performance on a home loan and their rankings on two standardized types of credit scoring programs. One is the FICO score; the other is the MDS.
Credit score rankings are based primarily on data included in one or more of a borrower's national credit repository files maintained by TRW, Equifax and TransUnion. Some proprietary scoring models factor in behavioral data on the number of jobs you've held, installment debt usage, length of time in your present house, marital status and others. Using sophisticated statistical formulas, the programs slice and dice your personal data into a single risk-predictive numerical ranking. How you score tells a lender about your relative likelihood of default or bankruptcy.
For FICO scores -- named after the San Rafael, Calif.-based Fair, Isaac & Co. that created the test -- the higher you score on an SAT-like scale from 400 to about 900, the safer credit bet you are. For the MDS score -- named after a firm with those initials in Atlanta -- the lower your score on a scale of zero to 1,300, the better.
Lenders can order either or both scores electronically at low cost from credit repositories or bureaus. Most mortgage lenders don't use them routinely yet, say industry experts.
But Freddie Mac's new directive is likely to make them commonplace in the conventional, nongovernment loan arena.
Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.