Numbers Count: FICO scores drop on approved mortgages

Posted by Chad Royle
Mortgage Banking

Numbers count. They matter to bankers and to prospective homebuyers, sellers, and real estate professionals. Here’s my take on the key numbers on the housing market this week.

Young woman in sunglasses at an outdoor cafe pulling a credit card out of her purse.The numbers: The average FICO score on closed mortgage loans fell to 722 in October — the fifth straight monthly decline since May, when the average was 730, according to Ellie Mae’s monthly Origination Insights Report.

What counts: The steady decline in FICO credit scores on approved mortgage applications indicates lenders are loosening their underwriting. But remember that lenders base loan approvals on numerous factors, such as your total debt payments relative to your total income — known as a debt-to-income ratio.

If you’re thinking of applying for a mortgage, or just want to manage your finances more effectively, it is good to know the factors that typically go into a FICO score: payment history, amounts owed, length of credit history, new credit, and credit mix.

  • Payment history: This is typically the most important factor in your credit score because a lender wants to know if a potential customer has paid past debts on time. Tips: Pay your bills on time, and if you miss a payment or are late for whatever reason get current as quickly as possible.
  • Amounts owed: Owing money is not a bad thing, but maxing out 10 credit cards might be. Your credit score takes into account total available credit and what percentage of that total is being used. Tips: Keep low balances on credit cards, and remember closing unused cards may lower your credit score because that lowers your total available credit.
  • Length of credit history: Your FICO score takes into account the age of your oldest credit account and newest account and the overall average age of all your accounts. Generally, a longer credit history increases your credit score. Tips: Be smart about opening new credit accounts, and think twice about closing old unused accounts since that will lower the average length of your credit history.
  • New credit: Opening multiple credit accounts in a short time may be perceived as risky and may lower a person’s credit score. Tip: Avoid opening new accounts that you may not need.
  • Credit mix: Although not a major factor, a FICO score does consider the variety of credit a person uses, such as credit cards, auto loans, and mortgages. Tips: Having a credit card may help your FICO score — but only if you manage your debt responsibly and make payments on time. Don’t add accounts just to try to raise your credit score.

For a more detailed look at FICO Scores and managing credit, check out this guide.

The bottom line on credit scores, in my opinion, is they are an indicator of smart money management. It is useful to understand the components of a credit score, but it is more important to develop sound habits for managing credit and money generally.

Made Here: Careful financing and customer selection drive growth

Small Business Banking

Manufacturing in America is alive and well. In our “Made Here” series, we talk to some of our manufacturing business clients and learn how they’ve flourished in spite of tough odds in recent years.

Jeff Lemon, CEO of Foamtec, inside his headquarters building.Foamtec, a Northern California manufacturer of decorative architectural shapes, has been growing in part due to a strategy of selling to distributors rather than direct to contractors and builders. This move by Jeff Lemon, Foamtec’s owner and CEO, has allowed him to expand and insulate his seven-year-old company from the common slowdowns in the homebuilding industry.

In the Q&A below, you’ll see Jeff researches his prospective customers carefully, choosing strong distributors who will market his products through social media, Google ads, and other means. More recently, Jeff has used access to credit to improve cash flow with volume discounts from suppliers and to invest in equipment to improve his products and speed up production, enabling his company to sell more.

Q: How would you characterize your growth?

A: Our pattern of growth has been pretty consistent — anywhere from 15 to 20% growth each year. If I would have stuck with working direct with contractors or going to builders, we would have gone up and down with their business.

How did you decide to sell to distributors rather than direct?

I took different business models from the other companies I worked at. I took what they did well and combined them into my own business model. It definitely paid off for me. We’ve focused on selling to distributors and picking and choosing — because not all distributors are going to fit our business model.

How do you choose distributors?

A lot of the distributors have an online presence, so I look at how they’ve structured their websites, how easy it is for the end-user to navigate, and how well they’ve marketed competitors of mine on their sites. I look for someone doing a little bit above and beyond, with blogs or a lot of advertising on Google.

Have you had a growth plan, or has it been spontaneous?

Up until about six months ago, it has been somewhat spontaneous. Once I finally got in with a bank that would help me and give me lines of credit, that has opened a lot of doors to see what we can do better to provide for the dealers selling our product.

We’ve reinvested money into the company by making new molds, bigger molds, and more of the same part so we can produce faster and satisfy the needs of what people are looking for in the market.

When you look at planning for growth, what do you take into consideration?

It really does come down to cash flow. Up until recently cash flow has been really tight. The lines of credit really helped in the sense that I can take that money and reinvest it into what we’ve needed the whole time to really make the company grow.

And then how about on the accounts receivable end? You’ve got more customers buying more product, and you’re waiting the usual 60 or 90 days for payment, so that can be a strain on cash flow, right?

With the lines of credit, recent growth, and changes we’ve made, I’ve been able to produce a lot faster. So instead of an order going out in 30 days, it’s now going out in 15 days. I’m also able to collect quicker. The money is just spinning a lot faster now.

We’re also in the middle of purchasing equipment that will cut my operating costs. I’m going to spend probably $30,000 or $35,000 on a piece of machinery, but it’s going to cut my operating costs $15,000 to $20,000 a year. And not only is the machine going to cut costs, it’s going to produce an even better quality product.

What words of wisdom would you have for other manufacturers in terms of how to plan and manage growth?

Patience is key. I’m very young; my business is young. We have a lot of years ahead of us.

Pick one thing at a time: “What can we do to improve one step of production?” Then once that’s handled, you move on to the next one, and then the next. You just slowly pick away at it until all of the steps are flowing smoothly.