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FICO 8 Mortgage Score Could Make it Harder to Get Approved

by Miranda Marquit

Anyone who has tried to buy a home in the last two years knows that credit requirements have tightened quite a bit. Even people with decent credit are having a hard time getting approved for mortgage loans. And, thanks to the latest credit scoring product from FICO, it might become even more difficult to qualify for a home loan in the coming year.

FICO 8 Mortgage Score

In October, the Fair Isaac Company revealed its new Mortgage Score, based on the FICO 8 credit scoring formula. It is worth noting that FICO is always tinkering with its credit scoring formula, adding more factors, and increasing the sophistication of the measure. While we have a general idea of what is included in a FICO score, the truth is that the actual formula is a closely guarded secret. And, in addition to the more generic FICO score that we are all used to hearing about, FICO offers a number of different scoring products. These scoring products include those that rate depositor behavior for banks, as well as the FICO 8 Mortgage Score.

As you might gather from the name of this score, it is meant to help lenders figure out what sort of default risk you pose to them. On its web site, FICO describes the power of the FICO Mortgage Score:

The score includes 17 distinct scoring models, increased from the 12 included in the base FICO® 8 Score. This allows for more refined risk assessment of mortgage consumers that’s better tuned to reflect mortgage-specific risk performance. Five segments evaluate the future risk among mortgage consumers, including first mortgages.

It appears that, in response to the mortgage market crisis, FICO has been working on a way to help lenders decide whether or not help borrowers with loan modifications, as well as figure out which first mortgage borrowers are likely to default. One of the areas of especial concern to mortgage lenders is the growing segment of the market interested in strategic default.

Strategic default is a conscious decision made by a homeowner to walk away from a mortgage that is underwater. These defaults often take lenders by surprise, since borrowers do not show classic signs of being on the verge of mortgage default. They meet all of their other financial obligations and often have good credit. However, the point of a strategic default is to cut one’s losses, feeling that a home has depreciated so much in value that it isn’t worth to try and overcome the negative equity.

As Wallet Pop points out, one of the main duties of the FICO 8 Mortgage Score will be to help lenders more accurately predict which borrowers could be a strategic default risk. Don’t ask me what models the Fair Isaac Company would use to make such predictions, but apparently there are some tell-tale financial behaviors that could indicate that someone with otherwise good credit might end up employing a strategic default in certain circumstances. I wonder if the locale of the home you are trying to buy is included in the calculation as well.

Predicting Consumer Credit Behaviors

This development is just one of a large number of efforts to further reduce consumer credit behaviors to numbers that can provide at-a-glance assessments for financial service providers. With technology in the digital age providing the ability to collect a great deal of information about you almost instantly, it is little surprise that more factors, from income estimates to deposit behaviors to what you say about money on social media to where you bought lunch yesterday, are being considered as part of your consumer credit risk profile. Indeed, we may be moving toward a system that can provide real-time updates to your credit score.


Published or updated February 28, 2011.
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{ 2 comments… read them below or add one }

1 Douglas T.

I just refinanced my current Primary Residence. I closed all my other credit cards, lines of credit, boat and car loans. I then paid all of them off as part my VA Cash out Debt Consolidation Primary Residence Home Loan. Now I only have two mortgage debts reporting on my credit report. They are My Primary Residence and my now Rental Property Mortgages. My income is over $60,000.00 annually. I have $40,000.00 cash on hand, $250,000.00 Equity in my two properties and a Net worth of $450,000.00 with no other Debt. I am retired with stable income with an income to debt ratio of 40%.
Keeping in mind that I want my Credit to continue rising and obtain the best credit offers.
How long will it take my credit score to improve from 698 to a score above 740?
What types of new credit should I apply for?
How long should I wait to apply for a zero interest credit card ?

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2 Ryan Guina

Douglas, there are many factors that go into a credit score, including credit payment history, the average age of your credit accounts, number of accounts and the credit limits, credit utilization, and more. It’s not possible to say how long it will take for your score to increase, but the course of action you should take is the same for everyone: continue making payments on time, while avoiding adding new debt or opening credit accounts whenever possible. Over time, your score will continue to rise.

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