Perhaps one of the most confusing elements of the lending process is credit scoring. The credit score is often referred to by mortgage lenders and others as the “FICO” score, the acronym for the company that developed the mortgage credit scoring algorithm, Fair Isaacs Company. The credit score is a three digit number ranging from 300 to 850 with the higher numbers indicating better credit.
Different loan programs will have different minimum credit score requirements but most mortgages ask for a minimum credit score of at least 580 and can vary based upon the amount of down payment. For borrowers with lower scores, sometimes putting more down, such as 25 percent or more, will allow for a lower interest rate. The best rates available are for those with credit scores of 740 or above and/or down payments of at least 20 percent of the sales price or with a 20 percent equity position in the instance of a refinance.
When a mortgage company requests a mortgage credit report, the request is made to all three major credit agencies, Equifax, Experian and Transunion. Each of these bureaus provides its own three digit score using the FICO method. Most often these three scores will be similar yet rarely exactly alike. For example, the three scores pulled might read something like “741, 738, 750.” The lender will throw out the highest and lowest and use the middle score. When two or more people apply for the same loan, the lender again uses the middle score but from the borrower with the lowest middle score.
Why are the scores similar but not the same? Scores are calculated based upon payment history, available credit, length of credit history, types of credit used and credit inquiries. Businesses subscribe to these agencies to access a potential borrower’s credit while at the same time reporting the payment patterns of their own customers. Sometimes not all businesses report to all three and even when they do, the payments made may not all be posted at the same time. Credit reporting is typically updated every 30 days.
One final note, understand that the mortgage credit score is different than a credit score you may receive from a credit monitoring service or other consumer service. If you pay a company to see your credit score, it won’t be the same as a mortgage credit report. The numbers might be similar, but not the same.