Your mortgage credit score might be lower than you think it is

Craig Berry
The Mortgage Reports contributor

Your mortgage credit score might not be what you expect

Many homebuyers don’t realize they have more than one credit score. And the score a mortgage lender uses may be lower than the one you see when you check it yourself.

Finding out late in the game that your lender thinks you have a lower credit score could be an unwelcome surprise.

If the difference is big enough to bump you into a lower credit tier, you could end up with a higher interest rate and/or smaller home buying budget than you’d planned.

So, why do you have multiple credit scores? How do you know which one is most important? And what score will lenders use to set your rates?

Verify your home buying eligibility (Apr 22nd, 2021)

In this article (Skip to…)

Why your lender’s scores are different from the free sites

There can be a disconnect between the credit scores you can obtain for free and the ones your mortgage lender is using.

Typically banks, credit card companies, and other financial providers will show you a free credit score when you use their service.

But the scores you receive from those third-party providers are meant to be educational. They’ll give you a broad understanding of how good your credit is, but they aren’t always totally accurate.

That’s partly because free sites and your credit card companies offer a generic credit score covering a range of credit products.

Creditors and lenders, on the other hand, use more specific industry credit scores, customized for the type of credit product for which you’re applying.

Mortgage lenders will use a tougher credit scoring model because they need to be extra sure borrowers can pay back large debts.

For example, auto lenders typically use a credit score that better predicts the likelihood that you would default on an auto loan.

Mortgage lenders, on the other hand, are required to use a unique version of the FICO score almost exclusively.

Since mortgage companies loan money on the scale of $100,000 to $1 million, they’re naturally a little stricter when it comes to credit requirements.

Mortgage lenders will use a tougher credit scoring model because they need to be extra sure borrowers can pay back those large debts.

So there’s a good chance your lender’s scoring model will turn up a different — lower — score than the one you get from a free site.

Where to check your FICO score before applying for a mortgage

Many free credit services don’t use the FICO scoring model, which is the one your mortgage lender will be looking at.

To be sure the score you check is comparable to what a mortgage lender will see, you should use one of these sites:

Whether it’s free, or you pay a nominal fee, the end result will be worthwhile.

You can save time and energy by knowing the scores you see should be in line with what your lender will see.

As long as you continue to make your payments on time, keep your credit utilization relatively low, and you don’t go shopping for credit you don’t need, over time your score is going to be pretty high for all every credit scoring model.

How your credit score affects your mortgage

When it comes to getting a mortgage, your credit score is incredibly important. It determines:

  • What loan programs you qualify for
  • Your interest rate
  • How much house you can afford
  • How much you’ll pay over the life of the loan

For example, having a credit score of “excellent” versus “poor” could save you over $200 per month on a $200,000 mortgage.

And if your credit score is on the lower end, a few points could make the difference in your ability to buy a house at all.

So, it makes sense to check and monitor your credit scores regularly — especially before getting a mortgage or other big loan.

The challenge, however, is that there’s conflicting information when it comes to credit scores.

There are three different credit agencies. And, there are two different credit scoring models.

As a result, your credit score can vary a lot depending on who’s looking and where they find it.

Verify your new rate (Apr 22nd, 2021)

How the 3 credit reporting bureaus affect your score

As many consumers already know, there are three major credit reporting agencies.

  • Equifax
  • Transunion
  • Experian

While it’s possible that your scores will be similar from one bureau to the next, typically you’ll have a different score from each agency.

That’s because it’s up to your creditors to decide what information is reported to credit agencies. And, it’s up to the creditors to decide which agencies they report to in the first place.

Since your credit scores depend on the data listed on your credit reports, more than likely you won’t see the exact same score from every credit-reporting agency. 

Fortunately, most agencies look at similar factors when calculating your credit scores.

As long as you manage credit and loans responsibly, your credit scores should be fairly similar to one another.

But different credit reporting agencies aren’t the only challenge.

There are also different credit scoring models. And, as if that didn’t already complicate matters, there are also different versions of these models.

How the 2 credit scoring models affect your score

In the old days, banks and other lenders developed their own “scorecards” to assess the risk of lending to a particular person.

But, the scores could vary drastically from one lender to the next, based on an individual loan officer’s ability to judge risk.

To solve this issue, the Fair Isaac Corporation (formerly Fair, Issac, and Company) introduced the first general-purpose credit score in 1989.

Known as the FICO Score, it filters through information in your credit reports to calculate your score.

Since then, the company has expanded to offer 28 unique scores that are optimized for various credit card, mortgage, and auto lending decisions.

But FICO is no longer the only player in the game.

The other main credit scoring model you’re likely to run into is the VantageScore.

Jeff Richardson, Vice President for VantageScore Solutions, says the VantageScore system aimed to expand the number of people who receive credit scores; including college students and recent immigrants, and others who might not have used credit or use it sparingly.

According to VantageScore reports, there were approximately 10.5 billion VantageScores used between June 2017 and June 2018.

FICO vs VantageScore

Prior to VantageScore being created in 2006, the financial services industry operated with only one choice in credit scoring systems.

The overwhelming majority of decisions involving credit applications were influenced by one scoring company — FICO.

VantageScore gave lenders a second, equally effective option.

Prior to FICO allowing credit card issuers to give away their scores to their customers, VantageScore was the only non-educational credit score being given to consumers on a large-scale basis.

The VantageScore model is designed to make it easier for consumers to build credit scores.

VantageScores are the ones that most consumers see available on free websites. But most mortgage lenders only consider FICO scores.

VantageScore uses data such as rent, utility, and telecom billing information; public records; and older credit file information to develop a profile of consumers.

Also, your credit history will be recognized more quickly with VantageScore because it will look at the first month of reported credit activity.

FICO, on the other hand, requires that an account be open for at least six months before issuing a score.

In addition, VantageScore has been credited for creating the free credit score market.

VantageScores are the ones that most consumers see available on free websites.

These are typically used by:

  • Credit card issuers
  • Personal and installment loan companies
  • Auto lenders
  • Credit unions
  • Banks
  • Tenant screening, telecommunications and utility companies
  • Consumer websites
  • Government entities

But mortgage lenders still predominantly use FICO scores.

How your credit scores are made and why they matter

Since there are few numbers that matter as much to your financial well-being as your credit score, it helps to know what your scores mean and how they work.

First, know that there’s a big difference between a credit report and a credit score.

  • Your credit report is a record of your borrowing history — Each loan or line of credit you’ve opened, dates on those accounts, payment history (including late or missed payments), and so on. Overall, it shows how reliably you manage and pay back your debts
  • Your credit score sums up your credit report in a single number — It weighs every item on your credit report to come up with an overall score (usually between 300 and 800) that sums up how responsible of a borrower you are

The big three credit bureaus — Equifax, Transunion, and Experian — operate in the realm of credit reporting.

Each one keeps a separate record of your borrowing history, based on the information your creditors send them.

The other players in the game — FICO and VantageScore — are responsible for credit scoring. They determine your score based on what’s included in those credit reports.

For example, keeping your credit utilization low can help your credit scores, while repeatedly neglecting to pay your credit card bills on time can hurt them.

Ultimately, your credit score is important in a huge number of ways. To give just a few examples:

  • Your credit scores determine the type of loans you can get and the interest rates you pay
  • Your credit score affects how large of a house or how expensive of a car you can afford
  • Insurers use credit scores to set premiums for auto and homeowners coverage
  • Credit score impacts your credit card interest rates
  • Landlords use credit scores to decide who gets to rent their apartments
  • Cell phone companies might require a deposit if your credit is too low
  • Etc.

Whether you’re looking for a mortgage or any other financial product, your credit score makes a big difference. That’s why it’s so important to know yours before you apply.

Do you qualify for a mortgage?

Credit guidelines for mortgages are a lot more flexible than many people think. In fact, it’s often possible to qualify with a score of 580 or higher.

You can check your own credit score online, and talk with a lender to see whether you qualify for a mortgage based on your current score.

Verify your new rate (Apr 22nd, 2021)