Credit Scoring

A major reason Fannie Mae and Freddie Mac lenders are willing to make immediate loan decisions is credit scoring. Credit scoring uses statistical samples to predict how likely it is that a borrower will pay back a loan. To develop a model, the lender selects a large random sample of its borrowers, analyzing characteristics that relate to creditworthiness. Each of the characteristics is assigned a weight, based on how strong a predictor it is. Credit scores treat each person objectively because the same standards apply to everyone. Credit scores are blind to demographic or cultural differences among people.

The most commonly used credit score today is known as a "FICO" score, named after the company that developed it, Fair Isaac Corp. FICO scores range from 400 to 900. The lower the score, the greater the risk of default.

According to FICO, the breakdown of a person's score is as follows:

- 35 percent of the score is determined by payment histories on credit accounts,
with recent history weighted a bit more heavily than the distant past.
- 30 percent is based on the amount of debt outstanding with all creditors.
- 15 percent is produced on the basis of how long the borrower has been a credit
user (a longer history is better if there have always been timely payments).
- 10 percent is comprised of very recent history and whether the borrower has been
actively seeking (and getting) loans or credit lines in the past months.
- 10 percent is calculated from the mix of credit held, including installment loans
(like car loans), leases, mortgages, credit cards, and so on.