In the last decade, mortgage lenders increasingly relied on credit scoring by the three biggest reporting agencies--Experian, Equifax, and Trans Union--to determine who they would loan to. This policy made underwriting cheaper and faster. And software like Fannie Mae's Desktop Underwriter and Freddie Mac's Loan Prospector pulled these scores from the bureaus, combined them with information about applicants' income and assets, and spat out approvals or declinations in minutes. Underwriting no longer involved extensive research, such as verifying your check-writing history with your bank and your job performance with your boss.
Well, the recent rash of foreclosures has demonstrated to lenders that credit scoring isn't the wonderful, money-saving, predictive process they thought it was. So now many of them are going back to basics, checking not only your credit report but going through court records, verifying your payment history with utilitiy companies and landlords, your property tax assessor, and your insurance companies.
A Time article claims that credit scores have proved poor predictors of performance on loans for that huge bloc of consumers whose scores range from 660 to 720. Mike Mondelli, president of L2C, which uses historical phone payments and other records to assess an individual's creditworthiness, says, "Traditional credit scores do a reasonable job of separating the very bad from the very good, but when it comes to the average person, credit scores are not very effective at figuring out who will pay back a loan and who will struggle."
The bottom line for those planning to qualify for a top-grade mortgage: get your score up to at least 660, but also take care of your other bills on time, don't bounce checks, and try to avoid tickets and other legal boogers. They could cost you big time and for a long time.
