The Not-So-Secret FICO Formula behind New Orleans Area Home Loans...
When anyone is in
the early stages of finding a New Orleans Area house to buy, unless they are
planning to pay for it with cash, a large part of what eventually happens will
be determined by the home loan they secure. Both the size of the home loan and its
interest rate are negotiable, but in almost all cases, the applicant’s part of
the “negotiation” consists of comparing offers from various New Orleans Area home
loan providers.
So unless you
are The Donald (or can supply your own wheelbarrow full of cash), New Orleans
Area’s mortgage companies will have a large say about what they think you can
afford for your next home. Even though they represent totally different
entities, their decisions tend to be awfully similar. The reason for that is
that they all work from similar information: your assets, your current ability
to generate cash— and your FICO score.
If you have
ever suspected there is some kind of mysterious secret formula involved in
coming up with that last, your suspicion was valid. But your FICO score isn’t a
total mystery—some parts of their formula have been (however grudgingly) made
public. Since the system is so pervasive, it’s good to know as much about it as
you can.
To begin with
“FICO” is just a company name. Back in the 50s, Bill Fair and Earl Isaac got
together and engineered a credit scoring system, and so Fair Isaac COmpany was
in business. Once Fannie Mae and Freddie Mac began to use them, it became a
very good business. Now all the major consumer reporting agencies (Experian,
Equifax, TransUnion—even PRBC and Innovis) use them. As to how they come up
with their all-important scores, FICO has published the exact formula (sort of):
· 35%: Payment history: If you have or don’t have derogatory information,
like bankruptcies, liens, judgments, settlements, charge offs, repossessions,
foreclosures, or late payments. It makes up more than a third of your score.
· 30%: Amounts owed: Your current state of indebtedness.
· 15% Length of credit history: This one is why borrowing anything early on in your consuming
career is a good idea. A long history makes you more trustworthy.
· 10% New credit: Have you recently been opening credit accounts all over the
place? That’s probably not a nifty idea.
·
10%: Types of credit used: A variety of
the kind of borrowing you have done also makes you more trustworthy: revolving
credit cards, car loans, home loans and lines of credit all broaden your appeal
(at least the way FICO sees things).
That sounds reassuringly cut-and-dried—but before you relax, remember
that ‘sort of’ we began with? As one
analyst writes candidly about the Types
of credit used category: “It carries the same weight as the New credit
category…but in reality, the two categories aren’t quite equal.” If you had
been under the impression that 10% = 10%, you now know otherwise. Also, FICO
itself states that the percentages it makes public “are for the general
population. For particular groups…the relative importance of these categories
may be different.” In other words, the percentages are hard and fast, unless
you are in a particular group. If you ask what is considered ‘a particular
group,’ it gets mind-numbingly confusing. Sort of like the sound of FICO clearing
its corporate throat and changing the subject…
Nonetheless, knowing just this much about what’s behind a New Orleans Area home loan originator’s decision will stand you in good stead when it comes to securing your next home. Another canny move: give me a call right from the start!
Terez B. Harris 504-297-2619
Terez B. Harris
Terez Harris NOLA Realtor Group
Terez Harris NOLA Realtor Group
(504)297-2619
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(multiple listing service)
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Terez B. Harris Terez Harris NOLA Realtor Group 504-297-2619 www.TerezHarris.com
Keller Williams Realty New Orleans 8601 Leake Ave. New Orleans, LA 70118 504-862-0100
Keller Williams Realty New Orleans 8601 Leake Ave. New Orleans, LA 70118 504-862-0100
Each office independently owned and operated. All brokers and agents licensed in the state of Louisiana.
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