Credit scores and your mortgage approval

A credit score essentially is a numerical “score” based on one’s ability to pay credit/debt over time. It is used by lenders to assist them in determining which loan program and interest rate can be made available to you.

The mortgage industry started utilizing "scoring models" in the early 1990’s. The use of scoring models in the mortgage industry came about as the major secondary market players known as Fannie Mae and Freddie Mac developed new automated underwriting systems. Those systems compare payment histories from literally millions of similar loans coupled with the credit score of the applicant.

The early creators of the automated underwriting systems believed that, if someone could go to a Mercedes dealership at 10 am and drive off the showroom floor an hour later with a $100,000 car (a depreciating asset), they ought to be able to obtain a home loan (an appreciating asset) the same way. The mortgage industry has been slow to adapt, but finally scoring models now figure prominently in the future of how people obtain home mortgages.

There are three major repositories of credit and background information: Equifax, Experian and TransUnion. When a consumer obtains credit, the creditor reports the payment history to these repositories. This is generally done monthly.

These repositories simply accept the information as it comes in electronically. This is very important to remember, they DO NOT check the accuracy of the information.

We have lots of information in this unveiling of credit mysteries; we hope it proves helpful to you. 

How Credit Scores are Used:

When you apply for a mortgage, your lender will request a tri-merge (all 3 bureaus) credit report from a credit reporting company. This company pulls together a credit report electronically.

Along with the information, the credit reporting company receives a numerical score. The score represents a composite of your credit history, employment, ability to save, and so on. The most well known of these scores is known as the FICO score, which was a model developed by the Fair-Isaacs Company. Scores can change literally daily, depending on the information received at the repositories.

The Fair-Isaacs Company and the other major credit repositories do not divulge how the scoring model works. Congress is pressuring the credit repositories to be more accountable for the accuracy of the information they report AND to divulge what goes into the scoring models, to help people better understand how to improve their scores.

Why is this important?
The lending industry is moving toward "risk-based" pricing. This means that the higher one's credit scores, the less paper they will have to provide to prove that they are creditworthy AND the interest rate and/or fees a borrower pays will be based on the level of their scores.

This system, while perhaps unfair to some, will be fantastic for those who maintain excellent credit. It's one way that good credit risks can be rewarded.

Did You Know?

Did you know that two (Experian & TransUnion) fo the three repositories have multiple scoring models? The scores that they provide you, when you order your credit report online, are "NOT" the scores provided for a mortgage credit decision? Your credit scores obtained online are "consumer credit scores". They also havea scoring model for auto loans. These scores can be 80 or 100 points different than your "Mortgage Score".

Important Hints: