Insufficient Credit Borrowers Have Accurate Scoring

(Applying for a mortgage evokes a lot of emotion.)

The first thing one probably thinks is how much the monthly payment will be. But for many other borrowers, or potential borrowers, just the chance to be able to have to pay a monthly mortgage would be a blessing.

Many immigrants and lower income individuals with low credit scores due to a lack of a credit history worry about how their ability to borrow a mortgage will be evaluated.

Thanks to a scoring system that takes into account limited access to things that create a higher or lower score, these potential borrowers can rest easy at least knowing they will be scored fairly and is explained in further detail in the article, “New scores gauge risk of borrowers with little or no credit” written by Matt Carter and posted November 20, 2006 on Inman News.

“Fair Isaac Credit Services Inc. says a recent study of its FICO Expansion scores -- which are used to qualify borrowers who have little or no information on file with credit bureaus -- demonstrates they are a reliable tool for predicting risk, and match up closely with the company's traditional scores.”

The FICO Expansion score was created by Fair Isaac in 2004, to supplement the “Classic FICO” score. The FICO Expansion score is intended to help lenders gauge the risk borrowers pose with thin or no credit bureau files. These applicants account for 20 percent of all mortgage borrowers and are predominantly recent immigrants and young adults entering the housing market for the first time.

“In the study, FICO Expansion scores consistently assigned lower scores to borrowers who later had more delinquencies and charge-offs, and higher scores to consumers who ended up with fewer delinquencies and charge-offs, the company said.”

The Classic and Expansion FICO scores are similar in the way the scoring is actually conducted, by rating the scores between 300 and 850, with 300 representing the highest-risk borrower and 850 representing someone who is the most reliable to back a loan with a significant balance.

“‘This whole set of data we worked through reinforced that the risk associated with a score of, say, 650 on the FICO Expansion equates well to a Classic FICO 650,’ said Fair Isaac Vice President Lisa Nelson, who oversees the FICO Expansion program. ‘That's a key component when you are out talking to the mortgage industry.’”

“The rationale is … to assess the risk of consumers, so you don't have to push them into subprime loans,” Nelson said.

Subprime or “nontraditional” loans are the loan and mortgage options that became very popular during the U.S. real estate market “boom” during the first half of the 2000s. These options were granted to high-risk borrowers with low initial monthly payments. The problem is, however, that once these lower payments reset, borrowers could face a monthly payment that was more than twice what they had been paying all along. This ultimately equated to the alarming amount of foreclosures being recorded every month.

“We pull in both the positive and negative, so it's not a consumer choosing to provide us with information,” Nelson said.

“In the study, Fair Isaac was able to score 50 percent to 70 percent of mortgage loan applicants with no credit bureau files and 65 to 85 percent of mortgage loan applicants with ‘thin’ files.”

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