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Explaining Credit Score Models

This article will provide a brief overview of different credit scoring models, the differences between actual and simulated credit scores, and the importance of knowing your actual consumer credit scores. 

FICO v. Vantage

Your FICO score is a score that is meant to evaluate creditworthiness. It is promulgated by Fair Isaac Corporation and was first utilized by lenders in 1989.  Your FICO score is calculated based upon the following five factors: 1) Payment history, 2) Credit utilization ratio, 3) Length of credit history, 4) New credit accounts, and 5) Credit mix. 


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In 2006, to compete with FICO, the three major credit bureaus developed the Vantage scoring model. This model calculates credit scores using some of the same factors as FICO, but also incorporates some additional information. The Vantage factors include: 1) Payment history, 2) Credit age and mix, 3) Credit utilization, 4) Balances, 5) Recent credit applications, and 6) Available credit. Although Vantage has been making a push in recent years, FICO scores remain the industry standard across various financial sectors for evaluating consumer credit worthiness.  

Actual v. Simulated

It is important to note the difference between actual credit scores and simulated credit scores. There are many websites, such as Credit Karma, that purport to provide consumer credit scores for free. However, consumers should be weary of putting too much credence or relying too heavily on those scores.  A simulated score is calculated based upon actual information in a consumer credit report, but it may not necessarily reflect your true credit score, which is promulgated by the FICO or Vantage models. There are many instances in which consumers review their simulated scores prior to applying for loan or other financial product, only to find out later that they do not qualify because their actual score is lower than the simulated score. 


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Importance of Getting Actual FICO Score

According to FICO, 90 percent of “top” US lenders use FICO scores when evaluating the credit worthiness of applicants. As the predominant scoring model in the US, consumer FICO scores will, more often than not, determine whether a consumer will qualify for the loan or financial product for which he or she is applying. It is imperative that consumers keep this at the forefront of their minds when devising a strategy or making a decision about when and whether they should apply for a mortgage or a car loan. 


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Whenever a consumer applies for financing, and the potential lender makes a hard inquiry (pulls the consumer’s credit), that consumer’s credit score is negatively impacted, and will decrease as a result of that inquiry. If a consumer believes that he or she will qualify based upon the simulated score, but is later denied, their credit score will take a hit unnecessarily. Because of the deleterious effect that hard credit inquiries have on a consumer’s credit profile, it is imperative that consumers know their actual credit score prior to applying for loans. There are companies that offer monthly subscriptions which include actual consumer FICO scores that are updated monthly. This type of service is invaluable for those who are serious about achieving and maintain credit health, and eliminating any guesswork when applying for loans.


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Ellie Mae: Credit Scores On Closed Loans Are Falling

Credit scores on closed loans continued to fall to their lowest levels since Ellie Mae began reporting data in August 2011, according to the latest Origination Insight Report released by Ellie Mae. The average FICO score on all closed loans fell to 722, marking the fifth consecutive month of decline. Additionally, the average FHA refinance FICO score fell 7 points to 654 while the average VA purchase loan FICO score declined to 705, its lowest point since April.

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Ellie Mae’s data also shows that the front-end and back-end debt-to-income (DTI) ratios have loosened materially to 25/39, the highest percentages since January 2014. Additionally, closing rates remained robust with over 66 percent of all loan applications closing for the fourth consecutive month. The closing rate on purchase loans remained steady at 71 percent.

“It is still too early to see if there will be impacts stemming from the Know Before You Owe changes that went into effect just last month,” said Jonathan Corr, president and CEO of Ellie Mae. “The time to close loans remained a constant 46 days for yet another month, while the closing rate on purchased loans has stayed above 70 percent. We may begin to see time to close increase in the November data as the new closing disclosures are utilized for the first time.”

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The Origination Insight Report mines its application data from a robust sampling of approximately 66 percent of all mortgage applications that were initiated on the Encompass LOS. Ellie Mae believes the Origination Insight Report is a strong proxy of the underwriting standards employed by lenders across the country.

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Credit Scores On Closed Loans Drops

Credit scores on closed loans fell to their lowest level since Ellie Mae began reporting data in August 2011, according to the latest Origination Insight Report released by Ellie Mae. The average FICO score on all closed loans fell to 723. Credit availability on refinances appears to have increased in Q3 of 2015 as the overall average FICO and DTI have loosened materially from Q2 of 2015.

Ellie Mae’s data also showed that refinances represented 42 percent of overall loan volume in September, a 5 percent increase from August. This was likely driven by the recent dip in interest rates. Additionally, closing rates remained robust with over 66 percent of all loan applications closing for the third consecutive month. The closing rate on purchase loans increased to 71 percent.

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“Average credit scores declined to the lowest levels we’ve seen since 2011,” said Jonathan Corr, president and CEO of Ellie Mae. “We are also seeing rates fall while the time to close is also decreasing. It will be interesting to see if these trends continue as we begin to see impacts from TRID.”

The Origination Insight Report mines its application data from a robust sampling of approximately 66 percent of all mortgage applications that were initiated on the Encompass mortgage management solution. Ellie Mae believes the Origination Insight Report is a strong proxy of the underwriting standards employed by lenders across the country.

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Other findings from the September report:

>> The average 30-year rate for all loans declined for the first time since May, falling to 4.280.
>> The time to close on all loans declined for the fourth consecutive month to 46 days.

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Market Analysis: Judging Risk

*Judging Risk*
**By Tony Garritano**

***Lenders today are trying to be more risk averse. But is it working? CoreLogic released its fourth quarter 2011 multifamily applicant risk (MAR) analytics. The fourth quarter MAR Index value increased three points from the previous two years showing a higher renter credit quality through the end of 2011. Here’s the scoop:

****The MAR Index for fourth quarter 2011 is based exclusively on applicant traffic credit quality scores from the CoreLogic SafeRent statistical lease screening model and is updated quarterly to provide property owners and managers with a benchmark against which to compare their portfolio’s performance. With this unique applicant risk index, property managers and owners are able to compare their applicant credit quality trends with that of the average MAR Index trends. This comparison indicates whether their portfolio is performing above, below or at market levels with respect to attracting and securing applicants with higher credit quality and an increased likelihood of fulfilling their lease obligations.

****When compared to the fourth quarter of 2010, the MAR Index increased three points in overall national renter credit quality, indicating a slightly better applicant pool. When comparing applicants for one- versus two-bedroom units, the MAR Index is slightly higher for one-bedroom units at 101, compared with 100 for two-bedroom units in the fourth quarter. The fourth quarter 2011 national MAR Index, which includes studios, one-, two-, three- and four-bedroom units (BR), was 101. This is a three point decrease in overall national renter credit quality from the third quarter value of 104, largely reflecting seasonal fluctuation typical of lower applicant traffic periods of first and fourth quarters.

****Regionally, the South and Midwest had the lowest MAR Index with values of 97. The Northeast continues to have the highest MAR Index with a value of 110. From a Metropolitan Statistical Area (MSA) perspective, the three MSAs with the leading decreases in the MAR Index were Buffalo-Niagara Falls, N.Y.; Miami-Fort Lauderdale-Pompano Beach, Fla.; and Phoenix-Mesa-Scottsdale, Ariz.; with decreases of three, one and one point, respectively. The three MSAs with the leading increases in the MAR Index were San Jose-Sunnyvale-Santa Clara, Calif.; San Antonio, Tex.; and Salt Lake City, Utah; with increases of five points.