Credit Score Articles

Mortgage Broker Names Credit Score As Determining Factor In Underwriting

Despite increased proof-of-income requirements, lending institutions still rely heavily on credit scores to determine whether to grant mortgage loans, the New York Times reports.

Mortgage professional Deb Killian has been in the industry for more than 16 years and recently spoke to the Times about a new trend that she is concerned about. According to Killian, more lending institutions and banks are using a consumer's credit score as the sole factor in determining risk and granting a mortgage loan rather than income, equity and other factors.

As more Americans are suffering from financial troubles and seeing their scores decline, Killian told the newspaper that some consumers are being excluded from mortgages through no fault of their own.

For example, one woman applying for a mortgage held a credit card that allowed her a $3,000 credit limit. She carried $1,500 on the card, bringing her credit-to-debt ratio to 50 percent. But after she transferred her balance to another card, her bank reduced her credit limit to $1,500, which raised her credit-to-debt ratio to 100 percent - consequently dropping her credit score and raising the interest rates on her mortgage, Killian told the Times.

Other mortgage professionals are speaking up about this trend, noting that while credit scores should be used as a factor in determining risk, they should not be used as the sole indicator of financial health.

"The amount of equity a person has in his home, his debt-to-income ratio, his job stability and his cash reserves are all better predictors than credit scores," Primary Residential Mortgage chief executive Dave Zitting told the Times. "And yet, the credit score has become the line in the sand for the banks."

Prior to the mortgage crisis, many Americans were able to secure financing with a score of 640, but many large lenders are now requiring a minimum score in the 700s to secure financing.

A recent report reveals that more than 43.4 million Americans now have credit scores of 599 or below, making it more difficult for them to receive loans or competitive rates. But consumers with low credit scores can improve them by managing their finances and refraining from opening new lines of credit, even for products as small as retail and gas cards. Paying bills on time and keeping their credit-to-debt ratio below 50 percent will also give their rating a boost.