(You may also want to read right-click and save) this information from Fair/Isaac & the Consumer Federation of America)

Lenders are in the money-lending business, not the real estate business. As a matter of fact, most lenders and banks are terrible conservators of real property, including their own. They are very happy to collect interest for the life of the loan or sell the right to service the loan if they want their money back early. Contrary to popular opinion, the lender doesn’t ever want to take your property if you don't pay a mortgage. That is the reason for the extensive credit documentation process before you are approved for a loan. It is also the reason that lenders will, generally, work with you to get your payments back in line if you find yourself in trouble.

In an attempt to predict the risk of lending you money based upon your past and present credit records, credit scores have tremendous popularity with lenders . It is not a foolproof predictor of risk, just as an IQ score is not a foolproof method of predicting performance in school. But, while it is not a foolproof prediction of the future, it is the route that most lenders have chosen to "get a handle" on the likelihood of whether a borrower will make timely loan payments.  Like it, or not, your future willingness to make timely mortgage payments will be based on how well you handled your credit obligations in the past.

Credit scores are derived from mathematical models or algorithms developed initially for the Experian credit bureau by Fair, Isaac & Company of California. The two other major credit bureaus, TransUnion and Equifax, have their own scoring models (also created by Fair, Isaac) which are called Empirica and Beacon scores, respectively. In common parlance, all credit scores are often referred to as " FICO"  scores (as all facial tissue is often referred to as Kleenex), but only the Experian score is really the FICO score. 

In case you are wondering...we do not know the "algorithms" used to create a credit score from a credit record.  Fair, Isaac keeps them secret.  But, there is some information available and we can make some good guesses, or use computer estimations, as to how much you can vary your score by taking various actions.  There is no guarantee, however.  The best way to get a handle on what raises or lowers scores is to examine the specific items that Fair, Isaac might list on a credit report.  Every score will have notes of the items, in order of importance, that affected the score.

Lenders, generally, base approval decisions on the middle score, if a borrower has three scores, or the lower score if only two scores can be obtained. A few lenders are more generous and will allow the use of the highest score for underwriting purposes and there.  There are also a (very) few that will require only one score.

Keep one thing in mind regarding credit scores:  If you do not use your credit accounts occasionally, a credit report may show no score even if your credit history is spotless!  This happens more than you might think.  Retired people, for example, often revert to the same spending habits as a person just "starting out".  That is, while they may have a perfect credit history and a number of credit accounts, they revert to paying for everything with cash, they have no home mortgage, and they stick close to home.  So, remember...You do not need to maintain a credit balance to maintain a credit score.  But you must use your credit periodically...even if you pay the full balance off each month.  Fortunately, using one credit card just once will generally make the credit scores reappear, like magic, within a month!

Many factors enter into your FICO score. Some of the factors that affect the score often are: 

• balances on accounts compared to account limits, 
• too few bank revolving accounts, 
• too many bank revolving accounts, 
• number of accounts with balances, 
• number of accounts opened within the last twelve months, 
• length of time accounts have been established, 
• amount of past due accounts, 
• number of accounts delinquent, 
• too few accounts rated "current," 
• recent derogatory public record or collection, 
• past due balances, serious delinquency, 
• derogatory public record or collection, 
• number of inquiries.

With a score below 500, it is very difficult to get any mortgage, though there are a few companies that ignore scores.  Governmentally guaranteed loans (FHA/VA) have little or no reliance on the actual score as a means of basing a mortgage approval.  These loans will analyze the actual components of your credit report, though some individual lenders may set a minimum score requirement.

What about higher scores?  Here are some important levels. With a score below 620, conventional mortgages of any type are hard to get. Between 620 and 680, the chance for conventional loans is questionable. Above 680 you should be OK. Above 700 to 740, you can get most loans including non-documented loans that may not even require that you prove that you are employed.  

When considering non-conventional or "sub-prime" loans, the score will often determine the minimum down payment:  You will rarely be approved for a 100% loan with a score of less than 580 or 600.  Between, 560 and 580 or 600, at least 5% down payment is generally needed.  Between 540 and 560 or 580, 10% is the usual minimum.  Below 540, 20% down payment, or more, is required.  These score requirements are for fully-documented loans.  With less than full documentation, the scores will need to be 20 or 40 points higher, or even more than that.  Various property types (ie: non-owner-occupied, condominium, mixed-use, multi-family, etc), locations, or other factors can also increase minimum score requirements.

Are these limits inflexible? We at Family Home Lending Corp try to be open to various possibilities because we know that people don't come from molds. We also have access to hundreds of lenders and thousands of loan products.  With a number of loan products, there is at least some flexibility. With others, there is none.  For every lender that will make exceptions on score requirements, there are many more that are completely inflexible.  And we have no control of that, except to find a more generous lender.  By using multiple investors, we make more options available to you.  Thus, while we can never make a 100% guarantee, we do promise to do our best to find a loan funded by a different investor when your credit makes a loan impossible for another one.  If we cannot, we will be happy to work with you to improve your credit and credit score so that you can be approved for a mortgage in the future.