CAN A LENDER accurately predict whether you're likely to miss a couple of mortgage payments, so charge you a higher interest rate? Or deny you a mortgage altogether?
After a comprehensive study, federal government researchers have concluded: If you have an extremely low credit score, the statistical probability is greater that you will default on payments.
While most applicants with low scores do pay off their mortgages, those with low credit scores are disproportionately represented among the total number of homeowners who ultimately fall into delinquency, researchers for the Federal Reserve Board found.
The new study focused on the fast-growing mortgage trend of using risk scores at the loan application stage to evaluate your likely future performance as a borrower. The scores are based heavily on information from your computerized credit files maintained by the three national consumer credit repositories -- Equifax, TRW and Trans Union. The study made use of huge pools of private, proprietary data on individual mortgage borrowers that have never before been opened to public view. Some data were made available by Equifax Credit Information Services.
Freddie Mac, the huge national mortgage investor, also provided proprietary information about the relationship of credit scores to mortgage payment behavior on single-family home loans it purchased in the first half of 1994 and tracked through 1995.
By examining the way borrowers with differing credit scores at application performed on their monthly payments over time, the researchers found that:
Consumers with low credit scores accounted for only 1.5 percent of new conventional fixed-rate mortgages made in one large sample, but they produced 17 percent of the total numbers of loans that went bad.
Homebuyers with high incomes don't repay their mortgages much more reliably than do buyers with lower to moderate incomes.
The real keys to predicting future foreclosure are low down payments combined with low credit scores. Borrowers who put little down and carry subpar credit scores are 50 times more likely to go to foreclosure than are borrowers who put down 20 percent and have high credit scores.
Nationwide, roughly one of five individuals carries a credit score low enough to create difficulties in obtaining a new loan or refinancing a mortgage. Certain regions seem to have more low scorers. For example, just 18 percent of individual New England borrowers and about 16 percent of Midwestern borrowers score low, whereas 26 to 28 percent of the borrowers in some Southern states carry subpar scores to the application table. Conversely, 71 percent of Midwestern borrowers are high credit-scorers vs. 59 to 61 percent in parts of the South. The Pacific and Mountain states track the national average -- about 20 percent low scorers, 67 percent high scorers.
Higher-income borrowers are considerably more likely to carry high credit scores (75 percent) than individuals from lower-income areas (56 percent). But the fact remains: Whatever your income as a home loan applicant, the odds are still strong that you carry a high credit score.
Pub Date: 8/04/96