It's a top-secret part of how lender's process mortgages. Some lenders may let you in on it --- if you're lucky. Of course I'm talking about FICO scores and the confidential way they're calculated and exploited.

What's a FICO score and why should you care? Many lenders today use a credit score to establish a borrower's credit worthiness. The lender doesn't calculate the score, but gets it from a third party such as the Fair Isaac Company, also known as FICO. 

Chances are in today's mortgage market a FICO score will dominate the lender's decision to approve your mortgage. If you score high enough, you will probably get the mortgage. If you score too low, well, no one will tell why it's too low, and on top of that, there's really nowhere to turn it you suspect errors.

Although there are others who offer the same service, Fair Isaac Company is the most highly recognized in the credit-scoring business. It's head quartered in San Rafael, California, but has regional offices around the world (on the Internet: www.fairisaac.com). Fair Isaac fills a gap in today’s quick-pace credit business. Their specialty is filtering a lot of credit data and boiling it down to a rapidly obtainable simple answer for their business customers.

Credit scoring actually started in 1956. Since then it has grown in favor and is widely used for issuing all types of consumer and commercial credit, mortgages, leasing and rentals, insurance, employment, telecommunications, retail and catalog sales, and for strategic business decisions.

FICO's scoring models are actually mathematical tables that assign points to different aspects of a consumer's profile and credit record. Examples of items scored include derogatory payment history, current level of indebtedness, types of credit, length of credit history, frequency of credit applications and number of credit inquiries.

FICO says that each of their 10 models was developed from studying the credit history of thousands of people. The patterns of credit use and defaults they uncovered then became the basis for how the model calculates a score. For example, one model may be for people with little credit. Another might be for a person with a bankruptcy. A third might apply to a person with lots of credit accounts. The important point is that the model used for your credit score can change, and this can alter the outcome of your score.

There are three categories that lenders use:

Conventional

700+, you are considered the cream of the crop by lenders. Of course that makes you eligible for the best rates. 

660 TO 690, you are considered a good risk and will get the good interest rates. 

620 to 650 will put you in a "questionable" category where lenders usually ask for more documentation. This doesn't mean you won't be approved, but you will have to work harder to get a loan and most likely not at the best rate available. 

620 and below, you may be out of luck ----- at least for obtaining the best rates and terms. 

FHA

700+, you are considered the cream of the crop by lenders. Of course that makes you eligible for the best rates. 

660 to 690, Excellent

650 to 620, Good

585 to 610. Acceptable

580 and below, Must have 2 to 3 compensating factors that override low score.

Example: Low ratios, Strong job stability, Good rental or Mortgage pay history.

HOWEVER, LOAN PROGRAMS ARE AVAILABLE THAT WILL PROBABLY SERVE YOUR NEEDS. REMEMBER: CREDIT PROBLEMS ARE NO PROBLEM 

Since no one but FICO really knows how their credit-scoring method works, the following are only a guess based on what some lenders have experienced. First of all, it's good to have at least three or four credit card accounts and a couple of department store charge cards. If you have loans with finance companies such as Beneficial Finance and ITT Credit this will probably not help your score. Also remember that the ratio of available credit to your current credit balances is a major factor in determining your score. In other words, if you have charged your cards to their limits, your score will suffer.

And finally, if at any time you have trouble making all monthly payments, use the following priorities:

First, pay as many as you can in full. Don't make partial payments. Pay your mortgage first, then other loans such as your car payment and next, pay your credit cards and other revolving accounts. Finally, avoid credit inquiries by limiting the number of credit applications you make