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

Which Credit Score to Get a Mortgage?

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.

Mortgage Rates Based on Credit Score

When it comes to most lenders, having a credit score of 730 or higher should give you the best rates on the market. But based on the lender, mortgage rates can differ almost by a 1% to 1.5% – which is a big deal when it comes to paying interest and can mean thousands of dollars saved. Make sure your credit score is cleaned and top notch – ready to be evaluated when applying for a mortgage loan. The credit score for mortgage approval is usually around 540, and this will qualify you for the basic FHA loan.

How your credit score affects your bottom line

Have you ever wondered  how much money you may be losing on your home loans because of your creditworthiness? It turns out, these days with lenders tightening the guidelines of to whom they are willing to extend home loans, the difference between an “OK” credit score and an “Excellent” one can mean thousands of dollars in savings on interest payments alone! Take a look at our data to see how your score can affect your mortgage payments and you decided if improving your credit score is worth all the hard work!

 

Mortgage Q&A

Question:  We are looking to purchase a home by the end of summer… any tips on how to quickly boost our scores? I would love to get my husband’s over 700, but he has a foreclosure (from 7 years ago) that is dragging it down just below that range. Any way to help move that off since it’s in the 7-10 year range?

Answer:  If there was a time to buy, you couldn’t have picked a better one, so congrats on that decision! It’s hard to give specific advice without knowing the full details, but here are some hints and advice based on what you’ve shared:

A foreclosure will have a severe negative impact on a score, however, the older it is, the less impact it will have. If this instance is 7 years old, it means it’s close to falling off of his report and won’t be the primary reason for the lower score, meaning there may be something else dragging it down.

If there is no other negative information – it could be low because of revolving debt, or credit card balances specifically. Paying down credit card balances would help solve that problem and give the score a boost.

However, if there is no other negative information – other than the foreclosure from 7 years ago –and his credit card debt is non existent or slim to none, then it may be that there is not enough activity or new, positive information to help counteract that single, older derogatory foreclosure. To recover from a major derogatory incident, it’s important to make sure you get back on track by adding new, positive account information and payment patterns. Often, you’ll see consumers try to completely exit the credit world and wait for a negative item to fall off. This actually hinders their ability to improve their score. Jumping right back in allows you to rebuild much more quickly.

If neither of these options fit your situation, then the only way to determine how to improve, is to know and understand why the score wasn’t higher in the first place. The way you do this is by paying close attention to the score factors that are returned with the individual score.

All credit scores have reason codes or key “score factors” that are returned with the score to explain why the score wasn’t higher. These factors are always provided in the order of importance, so the first factor showing where you lost the most points, the second, the second to most points, etc. Register here at CreditSesame and you will receive your free credit score from Experian. If you are looking at your score through CreditSesame, you’ll see these factors listed under the section entitled: “Key Factors that Impact Your Score.”

These score factors will help you identify where you need to focus to bring up the score. Because credit scores vary depending on the individual information in each person’s credit report, these factors can vary from individual to individual. This means what may be good for you, may not be good advice for someone else. However, there are a couple of “golden rules,” if you will, that can help you boost your scores and get them mortgage-ready:

  • Check your credit report for errors. Your credit scores are only as accurate as your credit report.
  • If there are errors, dispute them. It will take at least 30 days for the credit bureau to investigate your dispute and update your credit report with the changes.
  • Pay down your credit card debt. Get the balances as low as possible, or as close to 10% or less of the credit limits for maximum credit score points. And keep in mind, just because you pay off a credit card balance, or pay it down significantly, the update won’t immediately be reflected in your credit report. Unfortunately, credit card issuers typically only report updates to the bureaus once a month, when your statement drops. This means the balance reflected on your last statement will most likely be the balance on your credit report – which is used to calculate your credit score. This is why it’s a very good idea to begin strategically preparing 60-90 days before actually applying for a mortgage (or any loan on a large purchase).

This was a lot to digest but if you follow this advice, you’ll be able to pinpoint and hone in on exactly what’s holding your husband’s score down.  Good luck with the home purchase, and please, do keep us posted!

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