How are FICO scores used in classifying loans?

Question

What will be an ideal response?

Answer 1

In assessing the credit quality of a mortgage applicant, lenders look at a FICO score in order to a classify loan. A FICO score refers to how financial institutions rank the credit worthiness of
a borrower. FICO scores range from 350 to 850 . There is an inverse relation between a FICO score and a firm's credit risk. Thus, if a firm receives a high FICO score this means it has low credit risk. More details are given below.

In assessing the credit quality of a mortgage applicant, lenders look at various measures. The starting point is the applicant's credit score. There are several firms that collect data on
the payment histories of individuals from lending institutions and, using statistical models, evaluate and quantify individual credit worthiness in terms of a credit score. Basically, a credit score is a numerical grade of the credit history of the borrower. The three most popular credit reporting companies that compute credit scores are Experian, Transunion, and Equifax. While the credit scores have different underlying methodologies, the scores generically are referred to as "FICO scores."Typically, a lender will obtain more than one score in order to minimize the impact of variations in credit scores across providers. FICO scores range from 350 to 850 . The higher the FICO score is, the lower the credit risk.

The credit score is the primary attribute used to characterize loans as either prime or subprime. Prime (or A-grade) loans generally have FICO scores of 660 or higher, front and back ratios with the above-noted maximum of 28% and 36%, and LTVs less than 95%. Alt-A loans may vary in a number of important ways. While subprime loans typically have FICO scores below 660, the loan programs and grades are highly lender-specific. One lender might consider a loan with a 620 FICO score to be a "B-rated loan," while another lender would grade the same loan higher or lower, especially if the other attributes of the loan (such as the LTV) are higher or lower than average levels.