New FICO system could help borrowers who have marginal credit scores
The company that created the nation’s most popular credit-scoring method has introduced a supplemental program that could help millions of consumers borrow at a lower interest rate.
Q. I heard a radio report that said FICO is changing the way it calculates a person’s credit score. What are the changes?
A. Fair Isaac Corp., the company that developed the FICO credit-scoring system that is used by about 90 percent of lenders to help determine a potential borrower’s creditworthiness, isn’t changing the way it calculates a consumer’s overall score.
Instead, it recently introduced a new method of estimating a loan applicant’s ability to keep making their required payments in today’s uncertain economic times, as well as those that may come in the future.
Called the FICO Resilience Index, it uses credit-bureau information from both before and after the 2007-2009 Great Recession to help gauge an individual’s potential ability to continue paying his or her bills when things get tough.
It’s designed to be used by lenders in tandem with a person’s traditional FICO credit score, not to replace it.
In contrast to the longtime credit-scoring system, though, consumers will want to get the lowest possible numerical score on their Resilience Index rather than the highest. Based on a scale of 1 to 99, officials at Fair Isaac say that individuals who have an index score of 44 or lower will likely have a much better chance of meeting their bills during an economic downturn than someone with an index rating that is higher. FICO officials think the biggest beneficiaries of the new index could be homebuyers and other consumers who have less-than-stellar credit records but somehow have managed to pay their bills promptly.
“It’s great for consumers who may have lower-than-average FICO scores,” said Jim Wehmann, the company’s executive vice president. “Using this tool, lenders can have this visibility and lend confidently to millions of consumers that may have below-average scores.”
REAL ESTATE TRIVIA
The average American has a FICO credit score of 703 out of a possible 850, according to a recent report by financial website WalletHub.com. That ranks as “good” in the eyes of most lenders, but falls short of the 800-plus score that’s needed to be considered “excellent” and qualify for the lowest borrowing rates.
Q. How does an additional deposit work? A. The term refers to a homebuying plan that isn’t used widely today but can help buyers who don’t have a lot of cash now but expect a large amount of money in the near future — perhaps from a better-paying job, profit from the sale of a previous home, a big financial gift or a sizable inheritance.
It’s a fairly simple proposition. If, say, Buyer Bob wants to purchase Seller Susan’s home for $100,000 but can only come up with $3,000 of the needed $10,000 down payment today, Susan could accept the offer now but stipulate (in writing) that the additional $7,000 be included before the sale heads toward closing.
If Buyer Bob can’t deliver the extra $7,000 toward the down payment or qualify for a mortgage, Seller Susan can cancel the transaction and put the home back up for sale again. Usually, but not always, Susan could also keep Bob’s partial deposit.
Q. My husband and I recently toured a very nice home that is being offered for about $10,000 or $12,000 less than similar properties in the same neighborhood. When we asked the agent who is marketing the property why it is being offered at such a big discount, he refused to tell us based on the sellers’ confidentiality concerns. Don’t we have the right to know why the property is being offered at such a low price?
A. No, you’re not entitled to know why the sellers are moving nor the reason why they apparently set their offering price so low.
You can certainly pose those questions to both the agent and the homeowners themselves, but they aren’t legally obligated to answer.
Owners and their sales agents are often reluctant to disclose the reason for a sale. Some sellers simply want to protect their privacy. Others worry that answers such as “My spouse lost his job,” “We’re getting divorced,” or “We’ve made an offer on another house,” may suggest to a prospective buyer that the sellers are desperate and may be willing to make deep concessions in order to close a deal quickly.
Most real estate agents won’t divulge such information, either, in part because it could give a buyer an unfair advantage in the negotiation process or perhaps even invite an invasion-of-privacy lawsuit from the seller.
Send questions to David Myers, P.O. Box 4405, Culver City, CA 90231-2960, and we’ll try to respond in a future column.