In mortgage lending, a person's FICO score carries great effect on the lending process. The applicant's FICO score is used to help determine acceptability of the loan, the interest rate on the loan, and whether an applicant who has less than a 20 percent down payment will qualify for private mortgage insurance (without which they will be denied). Having a low FICO score has expensive consequences.

FICO is the acronym derived from the Fair Isaac Corporation, the company that developed mathematical models to evaluate consumer credit behavior. These models have become an accepted and accurate representation of a person's credit-worthiness, and are used extensively by lenders, insurance companies, and potential employers to evaluate candidates. People with high credit scores are proud of them — and they should be — because they show responsibility in the making of financial decisions and assuming the responsibility to retire debt obligations that they have incurred.

In the gathering of a true FICO score, there are three credit reporting agencies, each of which generates a FICO from a slightly different proprietary model. The middle score of the three — Equifax, TransUnion, and Experian — is used as the representative figure. Roughly speaking, a FICO score above 740 is excellent, 700-739 is very good, 680-699 is good, 620-679 is fair, and 619 and below is poor. In the current mortgage lending environment, for example, if a borrower has less than 20 percent of the sale price to put down on a property, and his credit score is 679 or below, the PMI companies will not provide mortgage insurance, and the borrower will not be able to receive the funding.

In a real world of busy schedules and an ever-increasing number of consumer services, people frequently have small delinquencies or dings that appear on their credit reports, perhaps erroneously, that can cause a disproportionate damage to the FICO score: they moved and missed a utility bill, or a medical bill was not paid by or improperly assigned by the insurer, or (in my case) the Internet service provider was changed and could not ever reach the current provider to cancel the service (I'd call the provided number, get routed to three or four more numbers and then be informed by a machine the last number was out-of-service).

FICO is addressing these situations by providing more flexibility with a missing payment by altering the models to ignore collections or missed payment of less than $100. In other words, these pesky dings against your credit will not diminish your score, according to FICO in its newest scoring model called FICO 08. Goods news, with a down side. If a consumer is habitually late in payments, or the use of credit is high (your credit limit is at its maximum on your credit cards), FICO 08 will penalize your score greater than the old model.

FICO 08 is being tested and validated by more than 400 lenders and businesses within their systems. Many credit-card companies, auto lenders, and credit unions may have adopted the new system already; however, borrowers should not expect that this new scale will affect them on every loan application. Traditional mortgages have not yet changed over because Freddie Mac and Fannie Mae have not yet approved of its use, and big bureaucracies are slow to change.


David Hultin (505-946-2521) is a residential mortgage-loan officer for New Mexico Bank and Trust. He previously worked in the mortgage divisions of two of the largest banks in the United States.