Importance of FICO

Every two years, Realtors are required to take courses to renew their licenses and, in a recent class, the importance of knowing your FICO score was emphasized.

These days, everywhere you look, there are many advertisements of free credit scores, but they may not actually be providing FICO scores. What a FICO score actually is (for those who don’t know) is a number that designates a consumer’s credit risk.

The majority (or 90%) of financial institutions use FICO scores to determine lending decisions and the interest rate appropriate to a loan applicant. Other credit scores are typically not used and can have a different value.

Should a business (including mortgage brokers) do a credit check, it can lower a consumer’s credit rating. However, if a consumer requests his or her credit score and provides it to a business, including a mortgage broker, it would not lower the consumer’s credit rating. The reason is that the provider checking a credit score signifies a future acquisition that can change your debt-to-asset ratio.

Websites that offer free credit scores may request a credit card and charge you for it unless a cancellation is submitted after the “trial period.” Further, many of these websites don’t specifically state that they provide FICO scores. Employees answering phones may not know that the credit score their company provides is a FICO score.

What was also learned from this class is that if a couple wishing to purchase a home seeks a mortgage, the person with the lower credit score becomes the basis for the loan decision and rate. If both incomes are required to get the mortgage and both names are to be on the mortgage, this remains the case.

Another issue was the accuracy of Zillow.com’s data. The Zillow.com website states that its “Zestimate” is not an appraisal and it is “used as a starting point to determine a home’s value. Zillow will not disclose its algorithm for determining its Zestimates. Zillow admits that it does not use data that is consistent and it may not even have the number of bedrooms, bathrooms or square footage of a home.

Zillow’s levels of accuracy are on its website. Zillow reportedly is 18.1% to 36% accurate of being within 5% of a sales price in markets it covers and 37.6% to 71% accurate of being within 10% of a sales price in the markets it covers. Where the confusion arises is when a property is listed for sale and Zillow inserts its Zestimate, which may be above or below the list price.

The property has not been seen by a Zillow employee and the data may be incomplete on the property and/or for the market, yet the Zestimate is presented near the listing price. This Zestimate can mislead buyers when presented in this manner.

Congress passed the Mortgage Foreclosure Debt Forgiveness Act in 2007. This law expires next month, which could adversely affect homeowners seeking relief in short sales, refinances and loan modifications because of reduced market values.

Under the Mortgage Forgiveness Debt Relief Act of 2007, homeowners could exclude up to $2 million of debt on a principal residence. Under this act, homeowners who incurred a significant home value reduction did not pay taxes on the amount of money that was forgiven. Starting January 1, 2014, the forgiven amount of debt will be treated as taxable income unless the act is extended.

 

Mary Ann Clark is a Realtor with Coldwell Banker at 177 West Putnam Avenue in Greenwich. Questions or comments may be emailed to [email protected]ol.com.

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