Credit Scores Used by Lenders Might Not Be the Same One You See

Homebuyers applying for a mortgage may discover the credit score their loan officer sees isn’t the one they thought they had.

That’s because credit reporting companies have dozens of formulas tailored for different scenarios. If you’re applying for a home loan backed by Fannie Mae or Freddie Mac – a so-called conforming mortgage – you’ll be vetted using older scoring models that meet the guidelines set by the government. And, it might not match the score you see when you check your credit report.

Jumbo mortgages that will be held on the books of a bank or the small slice of home loans that go into private mortgage bonds will have their own standards and might use different scoring models.

Exactly what goes into credit-scoring formulas is proprietary information – in other words, these are closely guarded secrets.

As a broad guideline, your credit utilization ratio – meaning available credit compared to how much of it you’re using – is responsible for about 30% of your FICO score. A good rule of thumb is to try to keep your balances at no more than 40% of your credit limits.

Paying your bills on time accounts for about 35% of your score, said Greg McBride, chief financial analyst at Bankrate. The rest is based on the length of your credit score, the type of debt you hold, and whether you’ve had recent credit inquiries, which indicate the possibility of a change.

Typically, lenders pull mortgage-tailored scores from the three major credit reporting companies – TransUnion, Experian and Equifax – and use the middle score. If a borrower has a co-applicant, lenders will probably use the bottom-middle score.

It often will be close to what consumers can see when they check their scores, but might not match.

Credit Karma and other services that offer to help consumers boost their scores can sometimes reflect higher grades than the number used by banks and other financial institutions.

The discrepancy is because Credit Karma doesn’t have access to reports from the credit reporting bureau Experian. The differences between the services can be as much as 100 points, according to users who have complained about the differences in the scores on social media.

Howard Dvorkin, the chairman of the personal finance site Debt.com, likens Credit Karma and FICO to different types of chocolate.

“There’s milk chocolate, dark chocolate, and white chocolate,” Dvorkin said in a statement. “They all have the same ingredients but in different proportions. Credit Karma, for example, uses something called VantageScore 3.0 to determine credit scores, while FICO uses its own long-standing proprietary model. So FICO beats VantageScore, much like dark chocolate is more popular than white chocolate.”

The Fair Isaac Corp. introduced FICO scores in 1989. According to Fair Isaac, the ratings are used by 90% of the country’s top lenders. VantageScore, introduced in 2006 as a joint venture of the three major credit bureaus, has a smaller slice of the market.

Both VantageScore and FICO gather data on how much a consumer borrows and how they pay back the debt to assess the likelihood of a person becoming delinquent on a bill in the coming years.

“They all use the same information, they just do different things with it – and they charge you different amounts for essentially the same service,” Dvorkin said. “What you’re really paying for is attention to detail.”

A “good” FICO score starts at 670, while comparable VantageScore ratings begin at 661.

Fannie Mae requires borrowers to have a minimum FICO score of 620 for a conventional fixed-rate mortgage and 640 for an adjustable-rate loan. FHA borrowers may qualify for a loan with a 3.5% down and a 580 credit score in some cases.

The right credit score, though, may not be enough to seal the deal.

Mortgage lenders also require that a borrower provide various financial records, including pay stubs, recent bank statements, tax returns, and investment account statements, to ensure that a borrower’s dream home won’t become a financial nightmare.

“Other factors, such as the loan amount, the home's location, your down payment, and loan type can all play into whether you'll be approved and your mortgage's terms,” Experian says. “Lenders may also have unique assessments, which is one reason shopping for a mortgage can be important.”