Lenders: How they really judge you

Today, qualification for loans as well as the rates and fees you pay increasingly are dependent upon a credit score.

Rick Harper, director of housing for the Consumer Credit Counseling Service of San Francisco, recently got a call from an unhappy borrower who had just agreed to a home equity loan.

The borrower, who had three days to rescind the transaction, had accepted a terrible deal. He was willing to pay a whopping $7,000 in extra fees to get a home equity loan because he was convinced his low business income hurt his chances of qualifying. "He was prepared to take a very onerous rate," Harper says. On Harper's advice, he rescinded the transaction and reapplied to a local bank. This is a prime example of what can happen when borrowers misunderstand how lenders operate, Harper says.

Many, for example, believe you need a large income to get a home equity loan. More important, Harper says, is the equity built up in the home and the individual's payment record.

Today, qualification for loans as well as the rates and fees you pay increasingly are dependent upon a credit score. This computer-generated number takes into account information on your credit report. It factors late payments, delinquencies, bankruptcies, existing debt, credit history, new applications for credit, and the types of credit in use. The final loan decision rests with the lender. But exactly how dependent the lender may be on this number can vary. So can the rates and fees they charge.

There is some good news. Due to credit scoring, your credit has to be pretty bad for you to be denied a home equity loan, mortgage or car loan entirely. Plus, more credit card issuers allow people to rebuild their credit with secured credit cards. Meanwhile, even if one lender refuses to approve someone, that doesn't mean all will. Rates and fees, though, can vary greatly from lender to lender. "If you have perfect credit, you can go into many (car) dealers on promotions of 0 percent or 1.9 percent for the first year," says Joanne Budde, executive director of the San Francisco CCCS office. "If you have bad credit, it (the rate) might be from 12 percent to 20 percent or more."

On the credit card side, it's pretty clear-cut. Close to 95 percent of the loans are judged by automated credit scores, Sangha says. Fair, Isaac and Company Inc. (FICO), San Rafael, Calif., the nation's largest supplier of credit scoring models, reports that a FICO score of 750 may qualify for a gold card while 675 may indicate a better match for a standard card.

On mortgages, lenders often have a bit more discretion. Borrowers with credit scores of at least 620 can qualify for the lender's best mortgage rate provided the borrower doesn't have too much debt relative to income. A credit score of 680 and above generally generates approval at the best rate. With a score of 620 to 680, on the other hand, the borrower may be referred to a loan underwriter who decides. A score of 620 and below puts you in the "recommended denial" category. Even someone denied the best rate still may qualify for a mortgage at a higher rate. Say the going rate for a 30-year fixed-rate mortgage is 8.25 percent, Harper says. That's typically what you can qualify with a score of at least 620. Lower scores might net you higher rates, say 9.75 percent or higher. "It doesn't matter how much you put down," Harper says. "You can't buy a better rate."

Lenders give greater consideration to different things for different types of loans. If you're applying for a mortgage, Harper says an employment record carries a great deal of weight. Lenders look for at least 24 months on a job. They also look for consistent earnings. That compares with equity and payment history on a home equity loan. Before you agree to any type of loan, it is important to shop around in your area to get an idea of what lenders are charging. Anytime you're offered a high interest rate or fees, pin down exactly why. "If it's your credit, find out what your credit score is," Harper advises. Even though a lender is not required to reveal a score, many will. Harper also advises against agreeing to any type of loan on the telephone. What sounds like a low rate may come with a whopping number of points or extra fees. That can translate in to thousands of dollars in extra payments over the life of a loan. Most importantly, Sangha advises to aggressively negotiate loan rates. "I would say six out of 10 times, you might get a break."