The three most important things in obtaining a mortgage are Income, Debt, and Credit Scores. The first two are self explanatory, but the third “Credit Scores” are not as easily defined. This is why it is important for those of us in the Mortgage and Real Estate Industry to be well informed on how Credit Scores work, so that we can better assist our Borrowers and Buyers in obtaining the house of their dreams.
Last Friday I started my first Post “Credit Scores Where Did They Come From & What Are They???” in hopefully helping others become a little more familiar with this very important component in the mortgage process. The first Post dealt with some of the history of “Credit and Credit Scores”, as well as an introduction into some of the “Credit Score Models” that are in existence today. Some of the better know models are the Consumer Models also know as Educational Models, Collection Models, Bankruptcy Models, Auto Models, and the one that those of us in the Mortgage and Real Estate industry are most concerned with the Mortgage Models. In this Post I want to go a little more indebt into the two models that most affect the Mortgage and Real Estate Industry, Consumer Models/ Educational Models, and Mortgage Models.
How many times have you heard a Borrower, or Buyer blame a Loan Officer for having significantly lowered their Credit Score because they pulled a new Credit Report on them? They are convinced that the lower score is the Loan Officer’s fault, because when they ran their own Credit Report it was 30 to 60 points higher. Therefore the Loan Officer has to be at fault, that is the only explanation that they can see for their Scores dropping that much. It is understandable for a Borrower or Buyer to feel this way, however, they are incorrect. Credit Scores do not drop by huge amounts just because a Loan Officer pulled a new Credit Report, in fact the change is minimal if any at all. The reason for the difference is because of the different Credit Report Models that were used by the Borrower/Buyer and the Loan Officer to pull the Credit Report.
When someone pulls their own Credit Report through one of these “Free Credit Report Sites” the model that is used is a Consumer Models/Educational Model. But when a Loan Officer pulls that same persons Credit Report the model that is used is a Mortgage Model. Even though the information used by these two models is the same, the weight that is given to each “Trade Line” is different. A Mortgage Model is going to place a higher weight on “Trade Lines” that have a greater impact on a mortgage then a Consumer Models/Educational Model will. Also a Mortgage Model will be more conservative in its Scoring than a Consumer Models/Educational Model.
There can also be a big fluctuation in Credit Scores even between the three major Credit Reporting Agencies Equifax, Experian, and TransUnion. The reason for this is because not all Creditors report their information to all three Reporting Agencies, so a Reporting Agency might be basing its score on incomplete information. Even when the information is the same the Scores are slightly different, because each one used a slightly different formula in arriving at their score.
It is also not unusual to see a Creditor reported on more than one Trade Line. For example Equifax, and Experian might be reporting on the same Trade Line, but TransUnion on a separate one. One of the main reasons for this is that Equifax, and Experian might leave out the last four digits of an account number, while TransUnion might show the whole account number or even just the last four digits. The Credit Limits and Balances will be the same, but the account number will appear differently. So since the account number is not being reported exactly the same by all three, it will show up on the Credit Report in more than one Trade Line. To someone who does not know this it will appear to be a duplicate amount on the Credit Report, when in fact it is not.
There is a major effort under way to correct the discrepancy in Scores between Reporting Agencies, by implementing a system by which all three major Reporting Agencies will use one scoring formula. This new Scoring system is known as VantageScore, and has been under development since 2005. VantageScore will have many advantages over the present Credit Report System, because VantageScore will be more consistent, and easer to understand. I will discuss VantageScore in more detail in my next Post.
I hope this Post has helped to clarify some of the mystery surrounding Credit Scores and Credit Score Models, as well as eliminate some of the myths about the cause for the fluctuations in Credit Scores.
Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or firstname.lastname@example.org