Suze Orman describes herself as a personal finance expert. Most of the time I agree with the advice she dispenses. However, there are times when I scratch my head and wonder where she gets her information. What worries me about a recent article she wrote is the confidence with which she dispenses advice based on false information.
Last Friday on Yahoo! Finance she had a column titled “Subprime Woes Lead to Credit Score Blues“. The goal of the article makes sense but there are a few things that are misleading. For example she wrote the following:
… before the subprime mess, a FICO credit score in the range of 620 was considered on the low-end of loanability. But in the wake of the meltdown, the low end has been raised to 680 or so by some lenders. In other words, you need to have a higher score just to have a shot at getting a deal on a mortgage or car loan.
This isn’t entirely true. Before the subprime mess 580 was the low point, furthermore, 680 is not the minimum today. You might think I’m splitting hairs but there are a lot of folks in that narrow band of credit scores and this kind of disinformation just scares them away from homeownership. To compound the issue she later makes this claim:
In the world of credit scores, 760 is the new 720
This isn’t true either. If you’re doing a Fannie Mae or Freddie Mac loan and you receive an approval on their automated underwriting system, you’ll get their best rate whether you have a 720 or 760.
Suze falls into the same trap that a lot of consumers fall into. They think that the loan decision process is purely credit score driven. It simply isn’t. The credit score is the starting point but not the deal killer. As I’ve written before the loan decision is made based on four factors:
- Credit Score
- Employment/Income History
- Available Liquid Assets
- Property Type
So, even if you could have a 780 credit score but don’t have any money in the bank and are self-employed you’re not going to qualify for the best loan program. Inversely, if you have a poor score but a solid employment history and six months of living expenses saved up, you will qualify for a mortgage.
I’m not making this up. Last month I closed a loan for a borrower who had a 583 FICO score but a solid work history and some money saved. We went 100% for this borrower and he received the best mortgage rate on the market. I am glad he didn’t have the opportunity to read Orman’s column because if he had he might still be in his apartment.
Suze also needs to take a look at the FHA loan program, especially now with all the changes being made to the program. For starters the FHA program is not credit driven at all. FHA takes a holistic approach to the borrower and makes a decision based on the big picture (the four corners I mentioned earlier). So, even if you do not have any credit, by using traditional credit lines we are able to obtain an approval and ultimately a loan for you.
The bottom line is, while the premise of Suze’s article is relevant, the specifics are simply not true. I want to assure the vast majority of borrowers with low FICO scores that you do not need to despair. Obtaining a mortgage is not out of the realm of possibility and the climate is certainly not as dire as you might think.
Min. Credit Score Set at 620 for FHA, VA Loans
Using the $8,000 Tax Credit to Cover FHA Loan Costs
FHA 203(k) Financing/Rehabilitation Loans
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on Sep 26th, 2007 at 7:58 pm
Awesome article, Shailesh, as always. I hope you don’t mind if I print it and use it (quoting you, of course) with my new buyer prospects. Well said, timely and exactly what nervous first timers need to hear right now.
on Sep 27th, 2007 at 6:07 am
Heather,
I’m glad you enjoyed it. I read Suze’s stuff from time to time and just can’t believe what she is saying. She makes millions doing it too.
Sure, go ahead and use this with your buyers. I would be honored!
on Oct 8th, 2007 at 6:01 am
[...] and Opinion:We all have our opinions, and Shailesh Ghimire definitely expresses his in Suze Orman’s Credit Advice Falls Flat. I also liked Matthew Paulson’s take on Why the Real Estate Market Slowdown is great for [...]
on Oct 19th, 2007 at 9:39 am
[...] in all loan approval processes the FHA loan looks at four elements of the borrower. I call it the four corners of a mortgage. The four corners model can be understand to understand what you as the borrower need to do in [...]
on Jan 18th, 2008 at 10:45 am
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on Oct 20th, 2008 at 1:51 pm
Funny, but nearly a year after your post here, I’m making similar comments about her advice about avoiding foreclosure.
What’s unfortunate is that she seems to have such strong opinions, but the advice is, at times, uninformed.
She’s been interviewed on Bloomberg, she’s a regular on Oprah, has her own show, etc. I just wish that someone so influential would do a little more homework.
on Mar 2nd, 2009 at 12:30 pm
Well fast forward a year and a bit more later and that guy with the 583 fico score probably would have been better off staying in his apartment with the current real estate in tatters….
You’re probably right on this- yes back then Suze was probably wrong the limit needed to get a loan, but then again if you have a 583 credit score you really should try to bring it up anyway before you get a loan even if you have money in the bank. I mean, you have to had made a mistake in order to get that 583 to begin with… just saying.
Not really arguing against your point, but I’m just saying that the person would have done a lot better saving enough until he could actually afford the 20-30% on that mortgage…
on Aug 16th, 2009 at 10:45 pm
Suze Orman is a great entertainer. She does make some sense on a basic level. She tends not to go very deep in her reasoning and usually offers shallow advice. You can tell that she picks her words as she speaks. To folks with zero discipline in regard to finances, she’s a genius. For those of us who have more on the ball, we can pick apart many of her rambling episodes. Great post. I loved it.