Understanding Credit Scores

What is a credit score

A credit score is a number between 300–850 that depicts a consumer's creditworthiness. The higher the score, the better a borrower looks to potential lenders. 

The importance of your credit score

In today's mortgage world your credit score is more important than ever.  Eligibility is based on minimum credit score thresholds and your available options, rates, and terms can be affected. It's always a good practice to check your credit report data for accuracy.  

Why the lender's score may differ from yours? 

The credit score you see when you pull your own credit score is not likely to be the same one your lender uses when making a decision on your creditworthiness. Both scores likely are accurate, but lenders use specific credit score formulas based on guidelines provided through Fannie Mae.  

The Credit Scores Lenders Utilize

The score you pulled from the credit bureaus or another third-party provider was a consumer score, or educational credit score, provided just to give you a perspective on your credit standing. They’re not the scores that lenders actually use to approve your application.

Services that provide credit scores typically include this information in their disclaimers.

On top of that, you likely purchased a generic credit score that covers a range of credit products. Creditors and lenders use more specific industry credit scores customized for the type of credit product you’re applying for.

For example, Auto lenders typically use a credit score that better predicts the likelihood that you would

default on an auto loan. Mortgage lenders use a score developed specifically for mortgage loans

Additionally, the third-party credit score you have obtained may not use the FICO scoring system which is the most widely accepted format for most lending institutions.  VantageScore, for example, is a competitor to FICO and offered through companies like Credit Karma, but this service calculates credit scores using their own proprietary algorithms and formulas.  The consumer scores are still accurate, they are just not specific to the formulas used for specific industries. 

In a nutshell, you will find a different score in almost any credit inquiry.  Even within FICO, there are over 300 different FICO score variations used to calculate your final credit score.  Auto vs Mortgage is just one example. 

 

As for the mortgage credit report, all mortgage lenders are required to use a formula standard set by Fannie Mae using all 3 bureaus. At the time this was published the current approved FNMA versions for mortgage lending are: 

  • Equifax Beacon® 5.0;

  • Experian®/Fair Isaac Risk Model V2SM; and

  • TransUnion FICO® Risk Score, Classic 04.

Lenders will use the lowest borrowers' middle score as the effective credit score on most mortgage loan products. 

 

Other factors that would contribute to a different score would be the timing of the updated data.  If you pulled your credit score and then 2hrs later an account updated it's information in one of the credit bureas systems,  Any credit scores pulled after that update would render a different score to the updated bureau or bureaus.  Credit reports also regularly have data that is incorrect so it’s always a good idea to double-check your data and ensure your information is accurate.   

Don't hesitate to reach out if we can answer any other questions for you.