FICO Practices Could be Hurting People that Should be Buying Homes

According to the National Association of Realtors (NAR), FICO is a major reason why they are not selling more homes – and not for the reasons that you might initially think. While there are a lot of people out there with deservedly low FICO scores due to various credit mishaps and delinquencies, says NAR, there are many other solid buyers who cannot get home loans who should be able to get them. NAR blames this on FICO practices that allow bank decisions about lines of credit based on market conditions rather than consumer and borrower performance to negatively impact scores.

For example, imagine that you have a line of equity on your home for $50,000, but due to market conditions and the declining value of homes in your area, your lender decides to reduce the max on that line to $20,000. You have paid on time and nothing is delinquent. You just now only have $20,000 to work with, and you owe about $17,000. Before the reduction, you were way under your limit, but now, you are about maxed out, which reflects negatively on your FICO score when you are evaluated for risk when you apply for a loan. As a result, realtors are finding that “people who are responsible users of credit” are suddenly unable to qualify for home loans and/or low interest rates that their past borrowing behavior, income and down payments indicate that they should be able to get.

Tom Salomone, a broker in Coral Springs, Florida, sums up the situation, saying: “There is absolutely no question these credit card and home equity line reductions are killing deals.” NAR is asking FICO to revise its scoring model to “help out with the nationwide foreclosure crisis.” Currently, FICO does not factor in bank and lender activity when evaluating a person’s credit situation, risk and score.