There are four facts about credit scores loan officers need to know, because in the mortgage finance industry we sometimes hear the following from borrowers:
“Are all credit scores the same?” or perhaps more often,“Why aren’t all credit scores the same?” There can be several answers to these questions. To best understand the facts about credit scores, it’s important for the consumer to consider the variables at play — what company provided the credit score; what version or generation of the credit score was used; and the timing of when each score was accessed. Any time a consumer applies for a mortgage loan and the lender uses a credit score, the consumer must receive a disclosure that identifies the score, the date the score was created, the range of possible scores, the key factors that adversely affected the consumer’s score and the identity of the provider. This information is intended to help consumers better understand each score.
CREDIT SCORE COMPETITION
The two most common credit scores used by lenders are the FICO® Score and the VantageScore®. They are separate and often compete for use by lenders. In the mortgage finance industry, FICO Scores generally are preferred.
FICO offered its first general-purpose score in 1989. FICO Scores are based on credit report data obtained from consumer reporting agencies, also called credit bureaus. Fannie Mae and Freddie Mac first began using FICO Scores in 1995 to identify mortgage loans for eligible for purchase by the companies.
In the mortgage industry there are also differences.Currently the following versions of FICO Scores are used:
Experian – FICO Score V2
TransUnion – FICO Score V4
Equifax – FICO Score V5
The VantageScore consumer credit scoring model was unveiled in 2006 as a collaboration of the three main consumer reporting agencies –Equifax, Experian, and TransUnion. The VantageScore is often used by non-mortgage lenders and in conjunction with some consumer credit report sites such as Credit Karma. Currently there is discussion about requiring the mortgage industry to adopt multiple credit scoring models, which requirement is under review by the Federal Housing Finance Agency (FHFA) although no timeline has been established for the completion of this review.
CREDIT SCORE RANGE
Historically, FICO Scores have a range of 300 on the low end to 850 on the high end. The first generation VantageScore had a range of 550 –990. If a consumer received a VantageScore and then applied for a mortgage loan which required a FICO score, the consumer’s credit scores may be (very)different. We have all heard these laments:
“I just saw my credit score and it was 750; now you pull my credit report and it is only 680. What did you do?!”
There could be several reasons for the difference. The most common cause may be that different credit score models were used with different credit score ranges. Both may measure the same basic factors but calculate them differently. What are some of those factors?
CREDIT SCORE FACTORS
For FICO Score, the critical factors are:
Length of Credit History
Applications for New Credit
Credit Mix/Types of Credit
MEANWHILE, FOR VANTAGESCORE THE FACTORS ARE:
Age and Type of Credit
Percentage of Credit Limit Used
Total Balances and Debt
Recent Inquiries for New Credit
Regardless of which credit score model is used, the most critical factor reflected in the score is the consumer’s payment history,specifically if accounts are paid on time each month. It’s also helpful for consumers to keep balances – especially credit card balances – low. A good rule of thumb is below 25 percent of the credit limit. Limiting any additional applications for credit until after the mortgage transaction is completed can also be helpful.
Even a single type of credit scoring model, such as FICO Scores, can yield different scores. Credit reporting is voluntary –creditors are not required to report to the credit bureaus or even to all credit bureaus.This can cause differences in credit scores. If a creditor or a collection agency reports to only one or two of the credit bureaus, there can be differences in the credit scores.
A credit score inquiry typically takes a ‘snapshot in time’of the consumer’s credit file and the credit score is calculated based on that information. Over time, a credit score will reflect changes in the consumer’s credit history, e.g., balances, late payments and new or closed accounts.
Creditors typically update account information on a monthly schedule. If a lender accesses a consumer’s credit file multiple times over a period of a few months, it may see changes in the consumer’s scores depending on the information included in their credit bureau files. And if creditor information reaches each bureau at different times, the scores may differ.
Finally, a consumer’s credit file may have reporting errors that can contribute to differences in scores. Every consumer should take advantage of obtaining a free copy of their credit report from each of the three credit reporting bureaus (available at www.AnnualCreditReport.com) to review their credit bureau files to ensure accuracy.
As a loan officer, if you understand these four facts you will be better able to answer your borrower’s questions about credit scores.