Robert Nusgart: Common sense is needed in credit scoring

One point.

That’s all that it took on this borrower’s credit score to go from having an approved loan to having no loan at all.

Twenty years ago if someone would have asked you what your FICO score was, you would have shaken your head. Credit scoring, as we now know, is what makes or breaks a person’s ability to get financing from just about every institution that offers credit.

Basically, there are three credit bureaus — Equifax, TransUnion and Experian — that issue scores for every person who has sought credit over their lifetime. The higher your score, the more creditworthy you are, getting you better terms and a more favorable interest rate.

Want a car with zero percent financing? Well, what’s your credit score? Want 18 months “same as cash” on that home improvement project from the big box stores. What’s your credit score?

Want a $250,000 loan from Fannie Mae? Your credit score better be 620 or higher. Have a 619 score and, “Sorry, Charlie.”

That’s what happened to this particular borrower. But what made this situation so frustrating is that he had done nothing to sabotage his score. Here’s the story.

When approached by a potential home buyer, the first thing that any loan officer should do is pull in a fresh credit report. That will typically paint the picture of that person’s credit history. Scores are issued from the big three credit bureaus. Throw out the high and the low, and the middle score is the qualifying score used. In this particular case, the borrower came to me in March to get pre-approved, and his middle score was a 623, barely above the 620 barrier.

Nowadays, when borrowers have a score below 640, they are lovingly referred to in the industry as a “scratch and dent” borrower. They may not be perfect — some late payments, a collection or two and maybe an old bankruptcy — but you can still run with them.

This borrower did have a bankruptcy that was discharged more than five years ago, but had also had a 30-day late on a credit card after the bankruptcy. Regardless, the 623 score was derived with all of that taken into account. Even so, the borrower had a very good job with excellent income and very little other debt. And, he had enough cash to put down 20 percent on his new home.

The only thing working against him was the low, but passable, score. Fannie Mae will permit scores as low as 620, but it comes with a price: a significant pricing adjustment, which in this case took this person’s interest rate from 4.50 percent for the most creditworthy to his rate of 5.375 percent. Still, he qualified.

He went looking for a home and finally found one and went to contract with a settlement date of July 29.

Here’s the rub.

The shelf life of a credit report for lenders is typically 90 days, meaning that his current report would expire before his settlement. We needed to update his credit report so that it would go beyond his settlement date.

Pulling new credit reports are always a risk, but wise loan officers should tell their borrowers that when they are looking for a home they should agree to be in what I call “credit lockdown.” That means, no applying for credit for anything and making sure that all bills are paid on time.

In this case, when the new credit reports were pulled, the high score moved higher, the low score moved higher, but for some reason the all-important middle score went from 623 to 619.

In a flash, this borrower had no loan from Fannie Mae.

He would have been in 620 but was out with 619.

What had he done?

The March and May credit reports were identical — except the May report showed smaller balances on the credit cards.

He had done nothing to affect his score. Instead some computer, somewhere in America, probably tweaked by some credit bureau geek, knocked him down. I have no idea why. It wasn’t fair. An appeal to Fannie Mae fell flat.

Again, one point.

I have no problem chastising borrowers who don’t heed my warnings and put themselves at risk of killing their own loan. But when something like this happens, you are left speechless and trying to think of ways to tell the borrower that through no fault of their own, their credit score took a hit and that we will have to look for alternative financing.

Solutions can be to go with an FHA loan, but that involves mortgage insurance, which would have bumped up his overall loan amount and cost him more on his monthly payment due to monthly mortgage insurance. Or possibly going with some other banking relationships I have that will downplay the credit score and look more at the down payment, income and overall viability of the borrower to make repayments.

I realize that lines must be drawn, but common sense should take over when a borrower is denied financing because his credit score dropped through no fault of his own.

It almost reminded me of Seinfeld’s “Soup Nazi,” who tells customers who irk him for no reason: “No soup for you.” In this case, it was the “Credit Score Nazi,” and Fannie Mae should do something about it.

Robert Nusgart is a loan officer with Prospect Mortgage LLC., which is associated with The Strata Group in Baltimore. He can be reached at 443-632-0858 or by email at [email protected] Visit his website at www.RobertNusgart.com for the latest mortgage and financial news.