What Is FICO 2008

Can renters obtain an 800 score?

High foreclosures, increasing bankruptcies, and record mortgage delinquencies have forced the Fair Isaac Company to further revise the formula that creates your credit score.  The new system is expected to be fully integrated by the Fall of 2008.

At the height of the housing boom in 2006 many mortgage lenders were led to believe that a certain threshold credit score was sufficient to waive the historical requirements for verifying income, down payment, and most importantly “payment shock”.  Payment shock is mortgage lingo for a renter’s increase in mortgage versus rent of 150% or more. 

For example, if your rent is $1,000 per month and your proposed mortgage payment is going to exceed $1,500 per month, you would have been subjected to “payment shock” and the bank would typically want to see money held in reserves after you close to the tune of 2 or 3 payments.

This type of common-sense underwriting was thrown under the bus with the false reliance on a high FICO score, hence too many people bought too much house with no cushion for any type of emergency.  Landlords do not report rent payments to the credit bureaus, so what are your options now?

“Thin Credit” profiles will punish renters who choose to be frugal.  Does this mean you have to be in debt to obtain the best credit score of 850?  No, but under the new formula you will not be rewarded unless you demonstrate an ability to manage both revolving and installment accounts over a longer period of time.

Vehicle loans and leases count as installment loans because there is a fixed payment for a fixed period of time.  Credit cards and other lines of credit that fluctuate count as revolving lines.  For the astute personal credit manager, this poses an interesting financial question:

 

• 1. Should you maximize your credit score through the purchase of a depreciating, non-tax deductible asset, or

 

• 2. Through the purchase of an appreciating asset with handsome tax deductions?

 Despite the news to the contrary, a person with a “thin” credit profile and an average FICO score above 620 can still purchase a home through little-known government programs with the best rates available through the department of Housing and Urban Development (HUD).  Only 4% of all lenders nationwide are active HUD lenders and then only a few of those can deal effectively with the more modest credit applicants.  For more information on what you can do to take the offensive.