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When it Comes to Mortgages, All of Your Credit Scores Matter

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When you apply for a credit card, auto loan, personal loan or almost any other loan, the lender will usually pull one of your three credit reports and one of your three FICO® credit scores. That process has been around since the early 1990’s and hasn’t deviated very much since.

The one glaring exception to the “one report one score” process is the mortgage underwriting environment. Which of your credit scores matters when you apply for a mortgage? Read on to find out.

Let’s start with a brief history lesson. In the mid 1990s, the Government Sponsored Enterprises (“GSEs”) Fannie Mae and Freddie Mac mandated the use of FICO scoring for lenders who chose to use their underwriting services and, more importantly, their money. By the later half of the 1990’s, the mortgage environment had been force-fed the use of credit scores, and they were not happy about it. In fact, I spent a good portion of my first few years at FICO traveling around the country speaking at various mortgage association events about credit scoring. I was always the least popular guy in the room.

When you apply for a mortgage loan, the lender or broker will not pull one of your credit reports and scores — but all three of each. And, if you’re applying for a mortgage loan jointly, the lender will pull all three of the co-applicant’s credit reports and scores, as well. This means that for a joint mortgage application, six credit reports and six credit reports will be accessed.

The credit report that is the result of all of this is called a Residential Mortgage Credit Report or “RMCR.” It’s also referred to as a “Tri-Merge” because of the merging of the three credit reports, per applicant. The report is normally accessed not by the lender, but by an intermediary company called a “Mortgage Reporting Company.” These companies go to the credit repositories (Equifax, Experian and TransUnion), buy all of the credit reports and scores belonging to the applicants, merge all of the information into one report (the RMCR) and then deliver it to the lender.

Normally, the lending decision is made using the middle of the applicants’ three scores. This “splitting the difference” is less aggressive than choosing the highest score and less conservative than choosing the lowest score. This makes having good scores at all three of the credit reporting agencies extremely important because you don’t know which one of the three is going to be your middle score.

To make matters more difficult, in June 1, 2010, Fannie Mae’s Loan Quality Initiative (or “LQI”) went live. This made it even more important to stay on top of your credit reports and scores during the underwriting process. A second set of credit reports could be pulled just before closing and any new debts incurred during the underwriting process could jeopardize your closing. So, don’t be tempted to take on any new credit to fill the house with furniture until after the closing.

The good news? At the very least, mortgage borrowers have enjoyed unprecedented access to their credit scores thanks to a 2003 amendment to the Fair Credit Reporting Act. The Act requires the disclosure of the credit scores used in connection with a mortgage loan application for residential property. The requirement is mandatory, so if you’ve closed on a mortgage loan in the past few years — go check your closing paperwork and you’ll probably find your FICO scores, or at least what they were when you closed.

John Ulzheimer is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO and Equifax, John is the only recognized credit expert who actually comes from the credit industry. He is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. Follow him on Twitter here.

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