Conflicting Credit Scores Cause Confusion

This excerpt comes directly from an Old Republic Credit Services monthly newsletter. It underscores what I’ve been telling clients. Mortgage credit reports and consumer credit reports use different scoring models to generate credit scores. Consumer credit scores are notreliable when planning for a mortgage.

Conflicting Credit Scores Cause Confusion

There is a lot of confusion in the marketplace today regarding credit scores. Television, magazine and newspaper ads encourage consumers to purchase their credit score. The confusion arises when a consumer buys a credit score online, and then finds out when purchasing a mortgage loan, that it is not the same score the mortgage lender/broker is using. Mortgage brokers and lenders say it happens frequently: A mortgage applicant says that he checked his credit score online. Then the Loan Officer orders the credit report and finds that the score is many points lower than the generic credit score the applicant quoted.

What causes the confusion?

Credit Scores developed by Fair Isaac Corporation (FICO) are the predominant credit measure used by the mortgage industry. FICO scores are used to predict a borrower’s likelihood of future nonpayment, with higher scores indicative of better creditworthiness. The score range is from 300-850.

Other commercial scoring models are widely available to consumers on the Internet. These scoring models use similar criteria to the FICO score but are based on different methodology and scales. While these models may accurately predict credit risk, the scores are developed for consumer use only and can vary from FICO scores.

Credit score confusion: A real life case showing the difference between consumer and mortgage credit reports

I have a client who has a service that monitors his credit and credit scores. He came in to pre-qualify with what he thought was a 750 credit score. Based upon that, I quote him the rate and fees for which he appeared qualified. When we ran his mortgage credit report however, his scores were 100 points lower. The same information appeared on both reports. The culprit? One JC Penny 30–day late two months prior. His resulting mortgage rate was higher.

How to get an accurate idea about your credit scores

When planning the purchase or refinance of a home, don’t rely on that free on-line report, the credit score from the car dealer, or even that promises to monitor credit card use and scores. When you get serious about buying or refinancing, call a mortgage lender and have them pull a mortgage credit report as soon as possible. Make sure you get a report that includes data and scores from all three bureaus. Your rate will generally depend upon the middle of those three scores, or the lower middle score if there are two borrowers.

Don’t be too concerned about harming your scores. Experian sees all mortgage inquiries during the past 15 days as a single inquiry. TransUnion and Equifax are far more generous, allowing 45 days. Getting a snapshot of your credit early in the process allows time to work on your scores if they need sprucing up. I’ll be posting in the next few days on a new tool that will allow me to play “what if” with credit scores to determine the most effective way to quickly raise low scores. Stay tuned!

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