mortgage point system? How does that work?

General Questions
#1

I’ve been told that when applying for a mortgage the banks/lending agencies use a point system to approve it (or not).
I am told that a part of this “point” system is based on credit rating/history. What I’m not clear on is what else they use to judge.

What is this point system and does anyone know what the banks base it on? What is it they look at (aside from your credit history) to assign any given point, and what are each of these elements worth?

Just starting to enter the world of personal real estate and would certainly appreciate any information available.

Thanks

#2

The credit rating bureaus provide a ranking as part of your credit report, if requested. The actual formulas that each use to calculate are closely guarded secrets, but some of the things which bring your score down are a history of late payments (30 days or more), especially recent late payments, default/collections history, bankruptcy, etc.

They also look at your income/debt ratio and the amount of unused credit you have available.

You can find out your score for each of the 3 credit bureaus (Equifax, Experian, and TransUnion) by visiting their websites. Although you can usually get a standard credit report for free, you will have to pay to get your credit score.

Usually a score of 720 or more is considered excellent.

#3

Some creditors assign a letter grade to an applicant. Here is an example. http://mortgage-x.com/library/credit_grade.htm and another http://www.forsalebyowner.com/mort101/creditabc.html and here are two calculators http://www.hsh.com/credscorecalc.html http://www.mybestmortgage.com/calculators/cg_cl.htm.

This is different from your credit report (which lists information about accounts and payments) and your credit score (which is based on the credit report). As you can see, the grade usually takes your credit score into account.
E.g., http://www.osmloans.com/programs.asp?SID=8A8A4BC7356042E59429C3DEF6AEF2DA

More frequently these days, credit gets “graded” in terms of the programs that are available to the borrower. But in the industry, we still talk about what kinds of loans we do, if we are speaking generally, by saying, “We do mostly A credit paper,” or “we buy C+ paper.” Something along those lines.

The idea behind credit grading is that the credit score does not emphasize some factors sufficiently. For instance, to a mortgage company, lates on the mortgage are highly relevant. As you can see from the examples, they look at mortgage lates separately. The lates are theoretically incorporated into the credit score, but mortgage lenders are less forgiving of mortgage lates than the FICO model is. So they make them a separate factor.

Hope this helps.

#4

Here is a good article that summarizes the grades.

http://www.mortgages-magazine.com/bad-credit.htm

#5

Thanks guys! Just a few more if you’re willing. How much do non credit items affect eligibility? For example things like marital status and current/past housing (for example, I have tended to move around a lot for no other reason than I just like moving). Would my penchant for roaming affect things?
Are there factors that a loaning institution would take into consideration to increase or decrease your rating?

#6

Discriminating based on marital status is illegal, so they don’t consider it at all. They usually ask if you are married because if you are married, your spouse might have to sign the documents, too. But that’s pretty much it.

http://www.hud.gov/offices/fheo/FHLaws/yourrights.cfm
Now roaming around won’t hurt you as long as your landlords are all happy. Sometimes they take rental history into account (depends on your credit score, and the program for which you apply, among other things)–so if you owe a landlord money, or didn’t pay your rent on time (especially within the last few years), that might hurt you.

Other than that, what you see is pretty much what you get.

#7

http://www.osmloans.com/promotions.asp?SID=7B0B50306BB244A5A611F5DE4A8FA376&promo=3

This page has an example of expanded credit grading. Notice that the lender is grading credit from AA+ to A-, but also notice that they spell out in the matrix what qualifies for each grade, making the grade superfluous.