Good Rate Depends on Credit Score
If you’ve applied for a home mortgage in the last two years, you probably know how important your credit score is to qualifying for a loan at a favorable interest rate.
What you may not know, however, is that on any given day, your credit score can vary by as much as 100 points, depending on which of the three national sources of electronic credit data your lender uses.
That variation--plus other factors sometimes beyond your control, such as creditor “inquiries” on your file--can cause you to be denied a mortgage or to be required to pay a higher rate than you expected.
And credit bureau experts say home loan applicants across the country routinely are being rejected or overcharged--unfairly and possibly illegally--because of scoring inconsistencies.
Take the case of first-time home buyer Eric Pawlowski, a 25-year-old electrical engineer in Chicago. Last May Pawlowski applied for a $135,000 mortgage to buy a $150,000 house. His mortgage broker, Oak Lawn Financial of Oak Forest, Ill., obtained a credit report on Pawlowski using the electronic files of one of the three national credit data “repositories”--Trans Union. (The other two national repositories are Equifax and Experian, formerly known as TRW.)
Pawlowski’s score was 661--well above the 620 minimum set by the giant mortgage investors Fannie Mae and Freddie Mac. Top scores on the so-called “FICO” scale used by most lenders are above 800; scores below 620 often get hit with higher rates and fees. Pawlowski got his loan without a hitch.
But three months later, Pawlowski decided that he needed additional money to remodel the house. He applied to the same broker for a home equity loan. Oak Lawn pulled a new credit report using Trans Union data but found that Pawlowski’s score had dropped to 604. Instead of qualifying for an equity loan in the 10% to 11% range, the best rate he could get was 16 1/2%.
Pawlowski was shocked. He requested copies of both his May 1997 credit report and his August 1997 report. Other than several credit balances that he had reduced, the two reports looked similar. The main difference was that there were two recent creditor “inquiries” on his August file that hadn’t been there in the spring. One was a “quality control” credit check by the Virginia bank that bought his loan in June from Oak Lawn Financial. The other was Oak Lawn’s own credit check for the equity loan.
The explanation for the drop from 661 to 604? The report itself listed “too many recent credit checks.”
Adding to Pawlowski’s frustration was the fact that when the local credit bureau ran his FICO score using data from the other two repositories, both gave him substantially higher scores.
Experian gave him a 657 and Equifax a 636. Either score would have been enough to qualify him for the equity loan he wanted.
So why was Pawlowski denied a mortgage at anything but 16 1/2%? Why couldn’t he use his 657 or 636 scores, instead of his 604?
Pawlowski was a victim of a national mortgage market that increasingly depends on credit scores to make decisions. Creditors frequently specify which repository’s data they want for an applicant’s score. Pawlowski’s equity loan lender refused to even look at Experian or Equifax scores because, according to his mortgage broker, lenders feel that in Illinois, Trans Union has the deepest data base.
Some lenders even distribute printed instructions specifying the “primary” and “secondary” repositories, state by state. Lenders’ choices vary and are not necessarily based on hard evidence that data from one repository is more complete or accurate than data from another.
Terry Clemans, president of American Credit Connection Inc., a large regional credit bureau based in Rolling Meadows, Ill., says that score variations can be huge.
In a random sample of more than 300 recent loan files he’s processed for lenders, Clemans found high-to-low variations of 100 points or more for scores on the same applicant pulled at the same time using data from the three repositories.
“I’ve seen swings of 150 points from the high [repository] to the low many times,” Clemans said.
Pawlowski’s second problem: He says he called Trans Union multiple times to get the score straightened out, but “I kept getting handed off” from person to person, with no resolution.
A senior attorney for Trans Union, Denise Darcy, said she couldn’t comment on whether two inquiries on a credit file could knock a score from 661 to 604.
A spokeswoman for the developer of the FICO score, Sally Taylor-Shoff of Fair, Isaac & Co. of San Rafael, Calif., said her firm’s statistical scoring model normally discounts multiple inquiries from creditors during seven-day periods to avoid penalizing applicants who are shopping for credit.
Pawlowski, meanwhile, continues to be penalized by the system. He recently applied for credit from a local Home Depot store but was turned down. The reason, he says: His Trans Union-based credit score, with still another “inquiry” on it, is too low.
Distributed by the Washington Post Writers Group.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Average Mortgage Rates and Indexes
Weekly Survey of 90 Southland Lenders as of Dec. 4, 1997*--*
Latest One Week Six Months week previous previous Rates for loans under $214,600 30-year fixed 6.93%/1.94pt 7.00%/2.00pt 7.66%/2.00pt 30-year 5.65%/1.66pt 5.66%/1.69pt 5.84%/1.33pt ARM start rate 15-year fixed 6.67%/1.87pt 6.77%/1.85pt 7.35%/1.75pt Rates for loans over $214,600 30-year fixed 7.25%/2.00pt 7.28%/2.03pt 7.80%/2.03pt 30-year 5.72%/1.63pt 5.69%/1.66pt 5.76%/1.65pt ARM start rate 15-year fixed 7.02%/1.89pt 7.08%/1.82pt 7.56%/1.87pt FHA or VA mortgage average points 7.00%/2.01pt 7.00%/2.38pt 8.00%/1.03pt CALVET 30-year ARM start rate 8.00% 8.00% 8.00% 6-month LIBOR 5.969% 5.938% 5.938% 1-year 5.540% 5.500% 5.760% treasury bill 6-month 5.220% 5.220% 5.200% treasury bill 6-month certificate of deposit 5.830% 5.810% 5.820% Prime rate 8.500% 8.500% 8.500% 11th District cost of funds 4.957 4.941 4.822 For the month of Oct. ’97 Sept. ’97 April ’97
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Compiled by Mortgage News Co., Morro Bay, Calif.
