Credit Rating - how sub prime lenders rate your credit? : Bad Credit Advisor

Credit Rating - how sub prime lenders rate your credit?

Credit rating question from a reader. Credit rating used by sub prime lenders is not simply a credit score, but a combination of several factors.

Q: I have some issues with my credit report and my scores are only as follows: TransUnion - 595, Equifax - 610, Experian - 587.

I am a firefighter and first time home buyer. I have 10 percent to put down. I found house that I like and have been looking for a mortgage for the last two weeks with three different mortgage companies, funny they are located within 2 miles radius here in Seattle, and I am puzzled. Each told me that my credit essentially sucks, but came up with the different designations. According to them, my credit ratings are B, C+ and A--. When I pressed for details, they couldn't give me any, I have a feeling these fellas don't know what they're doing. I told them not to run my credit, I paid $12 to the first mortgage broker I applied to and got my own tri-merged copy - thanks for your site advice..., one dummy didn't even know that frequent credit pulling will bring my score even further down.

Anyway, what I want to know is how banks call those credit grades, I feel almost like in grade school. And the other question, my buddy told me that I can get a mortgage on better terms because I am fireman.

A: I will start from the second question. You can't get any breaks, unfortunately. Your friend was talking about Community Outreach programs offered by many lenders today. These programs let qualified teachers, policemen, firemen and certain medical professionals obtain home loans on better terms. Your credit score however ruins this opportunity.

Now to the first question. Mortgage industry has attracted huge numbers, just like the real estate agent profession became almost a national occupation. So you will find many newcomers.

Credit rating is made to look and sound quite complicated for a consumer, when it comes to sub prime lenders, and that is where you, regretfully, fit quite nicely with your FICO scores. In reality credit rating is pretty simple.

Every sub prime lender has between 5 to 7 credit grades on its credit rating or credit grading scale. The parameters taken from consumer credit report that define those grades, are very much alike, but the designations used are often different. One bank calls its credit grades AA, A+, A-, B and C. Another uses A+, A-, B+, B, C+ and C. Yet another will put Premium A, A, A-, B+, B, C and D. You got the picture, I assume, now lets get to the credit report parameters.

The term "lates" used, means being late on the payment - 30, 60, 90, 120 days "lates" on credit card bills, car loans, student loans, mortgage payments, etc.

Loan-To-Value or LTV for the house is the ratio between the outstanding mortgage and value of the house. So if the mortgage is $200,000 and the house is worth $250,000, the LTV is 80%. If the purchase price is $400,000, and the down payment $40,000, LTV is 90%. Low LTV means high equity and is extremely important in sub prime lending.

The FICO refers to middle FICO score.

Important notice - these grades assume the consumer has sufficient verifiable income and assets.

Forget about credit card "lates" and even car loan "lates", charge-offs and collections under $400 - 500. Unpaid medical bills, unless in large amounts are also often overlooked. These things are already worked into you FICO score.

The important things for sub prime lenders are these FICO credit scores, mortgage "lates", bankruptcies, foreclosures and LTVs. Student loans can be a very touchy subject as well. For clarity sake, we will use letters A, B, C, D, E, F, G. Here it goes:

A credit - no mortgage "lates" for 30 days in the last 12 months, you didn't have bankruptcy discharged or home foreclosure in the last 36 months. You can buy home with No Money Down, or refinance taking cash out from your home equity up to 100% LTV if your middle FICO score is 580.

B credit - one 30 day mortgage "late" in the last 12 months, no bankruptcy or foreclosure in the last 36 months, 100% LTV with FICO of 600.

C credit - two 30 day mortgage "lates" in the last 12 months, no bankruptcy or foreclosure in the last 36 months, maximum 90% LTV with FICO of 560.

D credit - three 30 day mortgage "lates" in the last 12 months, no bankruptcy or foreclosure in the last 24 months, maximum 90% LTV with FICO of 550 but some lenders allow as low as 520.

E credit - one 60 day mortgage "late" in the last 12 months, no bankruptcy or foreclosure in the last 12 months but some lenders demand 18, maximum 85% LTV with FICO of 520 - 525 but some lenders allow LTV of 90% with FICO 540.

F credit - one 90 day mortgage "late" in the last 12 months or four 60 day with no 90 day "lates" or three 60 day "lates" with one 90 day "late", no bankruptcy or foreclosure in the last 12 months, maximum LTV is 85% with FICO of 600.

G credit - one 120 day mortgage "late" in the last 12 months, no bankruptcy or foreclosure in the last 12 months, maximum LTV is 85% with FICO of 600.

Few important points:

- this is credit rating general overview, your mortgage broker for will deal directly with the lenders and find, hopefully, the best mortgage for you.
- if you can't verify your income and or assets the credit grades are very different, you will have to come up with more down payment as LTV requirements are much more stringent. If you are self employed, you must furnish 6 months of bank statements to verify income, and in certain cases, lenders ask for 12 months.
- some sub prime lenders often have more lenient requirements in one credit rating area than then another, f.e. one bank will overlook too low of a credit score or too many mortgage "lates" that otherwise disqualify you, if you LTV is low enough.
- certain sub prime lenders use the highest FICO score or arithmetic average credit score in place of middle one, this can help certain applicants.

Now, let's talk income and reserves qualifications. Income is qualified by Debt To Income ratio and depends on LTV. Debt to income is the ratio between the sum of all recurring monthly bills and gross monthly income. If LTV is at 90% or less, debt to income of 55% is allowed. For LTV over 90%, debt to income ratio is maxed at 50%.

Important thing you and your mortgage broker must understand, that sub prime lenders can often bend some rules and not all their guidelines are set in stone. The mortgage broker you choose, should be someone who works with the sub prime lenders primarily, not on occasion. One good example is few lenders will take you even with two 90 day "lates" and one 120 day "late" on your credit report, as long as no bankruptcy or foreclosure happened in the last 12 months and you have 30% for down payment for the home purchase, or there is 30% equity in the house you already own, so LTV will be at 70% or less.

Some banks don't bother if you had bankruptcy discharge two months ago, if your FICO credit score somehow gets to 620 - I have seen those cases, and your LTV is 95%.

Others will stretch debt to income ratio up to 55% even if you have no down payment, financing up to 100% for your home purchase or cash out - refinance. So as you see credit rating can be quite vague.

Wed Feb 1, 2006 11:02AM by Tony | More in Credit Repair |

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