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Mortgage Q&A: Uniform rules can’t fit all cases
Q. I recently applied to refinance my mortgage and was disappointed to learn that my credit score of 705 wasn’t good enough to get the best rate. I was under the impression that any score higher than 700 was considered to be excellent.
I have never made a late payment on anything, and I have just two credit cards. I charge quite a bit but always pay the balances in full each month to avoid interest charges. I thought I would be the perfect customer for a lender. Can you explain why my credit score isn’t higher?
A. I love writing this column because it’s a great platform for me to vent. Lately, I’ve been venting about the new appraisal procedures. You have given me a great opportunity to vent about credit scores.
A credit score supposedly is a “secretive” mathematical model that is designed to gauge a person’s credit risk and express it in a number. The three national credit bureaus — Equifax, Transunion and Experian — have their own models, so each person has three scores that may differ.
Credit scores give an underwriter a standard as to whether to approve a particular loan or determine a particular interest rate. Since the mortgage meltdown, the mortgage rate a consumer is offered has been based upon his credit score. And the rate can change with only a small difference in score.
What is the primary benefit of the credit score system? Well, after being in this business for more than 25 years, I can say the good thing about a scoring system is that it helps streamline the approval process. Before scores existed, I might have a loan rejected by a particularly unreasonable underwriter because of a minor “ding” on the applicant’s credit report. Today, it’s likely that “ding” might adversely affect the interest rate offered but wouldn’t cause the application to be declined.
I happen to think the credit scoring system does more harm than good, not just for consumers, but for the credit markets and the overall economy. The term “underwriter” is derived from the tradition of the person approving a loan signing his name at the bottom of the approval report. Underwriters unfortunately have been dumbed down to mindless clerks whose primary responsibility is to ensure that a loan application meets a series of inflexible requirements that may or may not be applicable to the particulars of the individually unique loan application.
Back in the day, underwriters had the responsibility of determining whether the applicant was a good credit risk by looking at the whole picture and making a decision. For example, a retiree with a couple million dollars in the bank but little annual income would and should be deemed a good credit risk and be approved for a loan. It’s common sense. The No. 1 rule of lending is that the best folks to lend money to are the ones who don’t need the money. Today, this retiree wouldn’t be approved because the “required annual income” box cannot be checked off.
Credit scores do the same thing. One tiny dispute on a medical bill or a low credit limit on a credit card can significantly lower a credit score. But a reasonable person manually reviewing the application likely would see that such things on the report are not evidence that the applicant is a poor credit risk.
The entire mortgage world has been standardized into a set of cookie-cutter rules. This is a bad thing in an industry where every situation is unique.
Henry Savage is president of PMC Mortgage in Alexandria. Send email to firstname.lastname@example.org.
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