Mortgage Myth Busters: FICO, BEACON and EMPIRICA - why care?

FICO, BEACON and EMPIRICA - why care?

As a prospective home buyer or real estate agent it will pay you to be aware of the different credit scores and why language may matter. Over the years people have learned the term "FICO" and often use it interchangeably for "credit score". The two are not exclusively interchangeable.

Confused Lady - Understanding Credit ScoresThere have been many times over the years I have heard a prospective borrower say something to the effect of, "I have a 750 FICO" or "my FICO is 681". The next couple of lines are the important ones and the rest is either setup or explanation.

In the mortgage industry the standard method of examining credit is called the "tri-merge". When a loan officer "pulls" an applicant's credit history they generally are requesting a report from three independent credit reporting bureaus. Typically these are Equifax, TransUnion and Experian. FICO is a risk model adapted by CRB's but sold under different names and each score is, nearly 100% of the time, different. What matters in the mortgage industry is that the applicant has all three scores and that the middle of the three, regardless of which bureau, meets the minimum requirement for the particular mortgage product being sought.

FICO is the Fair Isaac Company and they have, indeed, developed what is the de-facto standard for credit risk modelling. The reason that term is meaningless at the time of examing the applicants' credit is what is contained in the paragraph above. Whether the middle score is Experian's PLUS, TransUnion's EMPIRICA or Equifax's BEACON is irrelevant. Which ever score is the middle is the one used in determining credit risk based on score for the mortgage underwriting process.

Many argue that credit scoring models are cold and impersonal and often result in people with worthy credit being eliminated from qualifying simply because of a computer based decision. There may be some validity to this argument but I have not, in my years of examining credit, seen a valid example of this. Scores are based on payment history, available unused (or used) credit, length of time accounts have been open, the type of credit and a few other factors. We are not priviledged to see the actual algorithms used to determine credit score based on these factors. 

For more information see the article at "What is a credit score?"

Image: photostock / FreeDigitalPhotos.net

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I started writing on Active Rain in 2006 when I was representing the mortgage industry. I am no longer in that industry and many of the older posts contain outdated information. Please do not contact me for LENDING or MORTGAGE questions but rather contact a licensed mortgage professional from your area. I have always been in marketing and branding and that is still what I do. Thanks for reading!

Comment balloon 7 commentsKen Cook • October 06 2011 09:43AM

Comments

Good concise explanation Ken. I suspect you have had to explain this a few times:-)

Posted by David Gibson CNE, 719-304-4684 ~ Colorado Springs Relocation, Relocation, Luxury & Lifestyle residential (Colorado Real Estate Advisers LLC ) about 9 years ago

Thanks David. That obvious, eh? Yes and when I hear a loan officer say FICO I cringe. There will be a few who argue with me about it and say, "you know what I mean". Yes, I know but they don't know.

Posted by Ken Cook, Content Marketer/Creator (Content, coding, marketing, host.) about 9 years ago

Ken,

This is great up to: "Many argue that credit scoring models are cold and impersonal and often result in people with worthy credit being eliminated from qualifying simply because of a computer based decision. There may be some validity to this argument but I have not, in my years of examining credit, seen a valid example of this."

I have a few years of experience, too. I've seen more than enough for both of us. Your statement remindes me of those people that don't believe in hunting because it kills animals, but have no trouble buying meat at the supermarket. The most credit worthy applicant I ever had, had a 480.

All any of the scorings do is measure people against their model. It's true that most people with credit problmes have low scores, but it's not true that all people with low scores have credit problems! (Excluding the problems caused by the low score!)

I should add none of this matters if you need the loan you need to optimize your credit score! I'd love to see a test case win, I'd hate to be invovled!

Bill

Posted by William J. Archambault, Jr. (The Real Estate Investment Institute ) about 9 years ago

Bill that's why I say, "I have never seen it" and I do not deny it can happen. I haven't seen it - not once. The closest I can get to it is people who always pay cash and have not developed a credit history. This makes them an unproven credit risk so, still, I agree with the credit scoring models. I would love to hear how your client with a 480 was simultaneously the most credit worthy applicant you ever had because I trust you and I have never heard a case I could get behind. (And believe me, every time I write something like this I get to hear about people who were on the bad end of a credit score!)

Posted by Ken Cook, Content Marketer/Creator (Content, coding, marketing, host.) about 9 years ago

Ken,

You ask.

He had 21 pages of active credit, I don't remember how many closed accounts he also had. He got down rated for to many accounts. Indeed his payments were over $50,000 a month. He had three credit cards, credit limit totaling $20,000 the balance when the credit was pulled was very close to the limit! More points lost.

To many accounts and his revolving accounts were maxed out!

What the scoring failed to consider was with a 7 year history to prove it, he had never had a late payment! But, accusal credit only accounts for about 1/3 of your score.

To many accounts? How does FICO, et.al. know how many are to many, if you make your payments?

His revolving credit was maxed out the day the credit was scored, so what? If they'd looked it was paid in full every month! He had his reasons for doing things his way. I didn't agree, but then again I never made $300,000 + a month, he did I had 3 years tax returns to prove it. I also read the report never a missed payment!

I tried to talk him out of the loan, but he wanted it, I called a local portfolio lender, they had the money waiting for him when he arrived 45 minutes later.

I financed enterners who often lived on credit and got shot down between gigs for to many accounts, gentlemen farmers are another that comes to mind for to many accounts!

I've seen many an applicant with only one account that was proven to be one to many!

The credit agencies don't know what a person makes or even excatly what he does yet they compare you to their model, all they measure is how you compare!

The credit agencies don't know what a person has in cash reserves or other assets.

I seen many a 700 FICO et.al. that I wouldn't loan enough to buy a cup of coffee!

Credit scoring has replaced the "Jim Crow Laws" as our number one, biggest source of institutionlised discrmintion! The only reason it's been allowed is because it's to embarassing to to admit you have a low score! I wrote about this last week.

Bill

 

Posted by William J. Archambault, Jr. (The Real Estate Investment Institute ) about 9 years ago

Bill that is certainly a worthwhile read. I have never seen anything so skewed but like I said in another post I have only closed about 3600 loans ... I'm still learning! Truth is most of my borrowers have been fairly "middle of the road" and I've never had an individual with personal expenses like that. Businesses, yes. Me, yes. Thanks for taking the time to share. I expected a phone call ha!

Posted by Ken Cook, Content Marketer/Creator (Content, coding, marketing, host.) about 9 years ago

Ken,

You have to remember that half of my career was in NV, first at lake Tahoe and then 20 years in Las Vegas. "Personal Expenses" no most were business expenses financed with personal credit, It's not the best way, but very common. It's defiantly not FICO's Joe Paycheck model.

3600 loans is extremily impressive! Extremely!

Bill

Posted by William J. Archambault, Jr. (The Real Estate Investment Institute ) about 9 years ago

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