The more you know about credit scoring the way many lenders now qualify mortgage applicant the more value you can bring to homebuyers at the margin.  Credit scoring, assigning numerical ratings interest rates to consumers on the basis of their credit history, has been used for 30 years by auto lenders, credit card issuers, and other extenders of consumer credit. 

Now it's being used to determine whether your homebuyers qualify for mortgages. Some say credit scoring widens the market and helps more people get a mortgage by removing human biases from the approval process. It also offers flexibility for buyers who are pushing the standard debt ratios but have proved their ability to handle the debt. Detractors argue that the approach pushes some buyers into higher interest rates or out of the home buying market completely.

Whatever you think of credit scoring, it's probably affecting your mortgage loan application.  Fannie Mae and Freddie Mac, which, in an average year, purchase about 58 percent of all residential conforming mortgages, began in the middle of 1995 to encourage the recommend use of credit scores by lenders.  

Then both, Fannie Mae and Freddie Mac agencies, later, introduced automated underwriting systems for lenders that include credit scoring.

Before, qualifying for a mortgage was as simple as paying your bills on time for two years, not paying more than 28 percent of with each model, your monthly income and no more than 36 percent other debts.  "It's not that simple anymore".

Credit scoring uses reports from any of the three major credit repositories, Equifax, Experian, and Trans Union, to grade consumers on a 900 point scale.  The scores are calculated by the credit bureaus not by lenders. The credit score isn't a permanent part of any credit history but rather a snapshot of a mortgage applicant's credit history.

Fannie Mae recommends that lenders do comprehensive reviews of borrowers with scores between 620 and 660. If the score is lower than 620-as low as 585-the down payment
should be at least 30 percent in order for borrowers to qualify for a conventional mortgage.

Those not qualifying may have to turn to subprime mortgages, which carry rates one-quarter to 5 percentage points higher than prime or conventional mortgages. The fees and closing costs are also higher.

Both Freddie Mac and Fannie Mae tell lenders that loans should be neither approved nor rejected on the basis of credit scores alone, but many lenders say they fear they won't be able to sell loans to either agency if scores are below 620.

The more than 100 variables used in credit scoring include the following:

• Existing credit cards
  
  Other open or active accounts, their type, the length of time credit has been available, and credit levels
  
  Current level of indebtedness and its relation to available credit
  
  Outstanding auto loans and other loans
  
  Credit performance, including the number and severity of late payments and delinquencies
  
  Number of inquiries or attempts to acquire additional credit, especially in recent months
  
  The object is to establish a weighted numerical measurement that reflects a borrower's likelihood of repaying the mortgage loan on time-the borrower's default risk.
  
  Every scoring model uses the same data to establish a score, but the weight attached to each component of the score is different

"It's this weighting that the developers of each model carefully guard, even going as far as not wanting lenders to reveal the scores.

That doesn't mean consumers shouldn't understand the process of scoring, though.  Consumers need to be educated about what's going to impact their credit scores.  You have to tell buyers to do nothing that will lower a credit score before they get a mortgage.

Having established credit, paying your bills on time, and keeping the balances on open accounts to moderate levels help ensure that you have a strong credit history and a good score.

Other recommendations include; Look at your credit reports early and not get new credit cards.  Don't shop and and establish new accounts before the closing of your home.  Buyers can go back and look, but they can't let stores run credit inquiries.

There is a possibility that problems will arise with your credit scores, unless totally prepared;

1. The weighting of the data used in determining a score is guarded on proprietary grounds.

2. Credit bureaus are often slow to record that outstanding loans, particularly student loans that have been paid off, increasing the likelihood that scores are based on inaccurate information. There could be credit issues that had been resolved two or three years earlier still impacting scores.

3. Many prospective borrowers never learn their score because many lenders won't reveal scores. The decision whether to share credit scores with borrowers is up to the lender.                                  

Finding an open lender that'll play it straight is the key to filling buyers' needs.

Say no to new credit;  To help buyers attain the best possible score, advise them to avoid any behavior that'll negatively impact their credit scores before their loan closing.  The following is information that will help the credit scoring process.

Don't let any stores run a credit check for a new credit card when you're shopping or looking for new furniture or appliances.

Don't get new credit cards, even when stores offer a discount in return for applying for a card.

Pay all credit card bills on time, even if it means paying utility bills late.

Refuse increases in your credit limit if the increase is more than you need or is high in relation to your income.

Payoff and close any existing accounts with finance companies, since they're viewed negatively in the scoring.

Close out unused credit card accounts.

Maintain at least one of your oldest cards to show a lengthy credit history.

Each of the three major credit repositories-Equifax, Experian, and Trans Union, has its own proprietary credit scoring model, Beacon, FICO, and Empirical respectively.
  
Before buyers shop for a loan, experts recommend that they check their credit report. Some states require that credit repositories provide consumers with at least one copy of a credit report annually at little or no cost.
  
Buyers can get copies of their reports from each credit repository;

Here's how to reach them:

Equifax: 800/685-1111;  www.equifax.com

Experian: 800/682-7654; www.experian.com

Trans Union Corp.: 800/916-8800; www.tuc.com