Question of the week: Why is credit score(s) I got directly from the credit bureau(s) different than the one you have?
Answer: It always interests me how often the same question or issue will percolate into my business in a very short period of time. In this case in the past several days I have had a couple of clients who obtained a free copy of their credit reports directly from one or more credit bureaus and the scores they received were different than the scores we received from our credit agency. The same can happen if you go to purchase a car and receive a report and score. Why is this?
Credit scores, commonly referred to as a FICO score (for Fair Isaac Company that came up with the credit score model), are used as predictors of future credit behavior by analyzing your past credit behavior. Weighting many different factors from number of accounts, to balances outstanding relative to credit available, to types of accounts, to payment history, to inquiries, the credit score model computes your risk as a debtor to a potential lender, be it for a mortgage, auto loan, school loan or credit card.
When credit bureaus issue a score they are using a “clean” model with little extra weight being given to any other of the factors that may be a stronger predictor of credit risk than others for certain types of credit accounts. Credit score models that are built for specific credit industries, often give more weight to certain factors based on a few decades of being able to analyze performance for individuals with those traits on their credit reports.
A factor that may have little bearing on predicting how someone will pay back a department store credit card may have a stronger bearing on predicting how someone will pay back a mortgage, or an auto loan. Because of this it is not unusual for you to have a different score on your credit report when it is pulled by an auto dealer than when it is pulled by our company or another mortgage company.
Even within the mortgage industry scores can sometimes vary. Major banks run direct reports through and determine the weight to put on factors they consider important for credit scores; which may not be the same factors, or weight, other lenders or credit companies use for their scores. For instance Bank of America may determine that high balances on revolving credit are a very strong predictor for credit risk and if an applicant has several accounts that are almost, or fully, maximized on their available credit their credit model will create a lower score than say Chase or Wells Fargo if they do not feel such balances are as much of a risk predictor.
As for Stratis Financial, and many other lenders and brokers, we use a credit company that is recognized and approved by Fannie Mae, Freddie Mac, FHA and all major lenders to provide accurate reports with score models that meet their standards for underwriting. Generally these types of independent credit companies use the same scoring models so credit scores are usually the same or very similar.
Often a client will ask if we have to run a new credit report since they have a report they received from the credit bureaus or another lender they have spoken to. The answer is no, we cannot. We can look at the report and use it to prequalify but we cannot use it to issue a preapproval or for a loan package. For those steps we, and every lender, must obtain their own credit report and import it into a loan file for review by Fannie, Freddie or a lender.
Have a question? Ask me!
Not a lot of data this week. Usually a quiet week of economic reports means a quiet week for the markets and stable mortgage rates. Not so this week, for what the business journals lacked in economic data they made up for in reporting on fiscal policy. After rates fell last week on poor economic data, Monday and Tuesday saw rates go the other way and quickly climb. Most of the climb was from profit taking. Stock prices rose ahead on speculation of what China may do to reverse its economic slow-down and whether the Federal Reserve would announce it would increase its pumping money into the economy.
Those hoping for more money from the Fed were disappointed when Chairman Ben Bernanke testified to Congress that the Fed was not going to begin another program of what it terms “Quantitative Easing” (QE) to follow the few trillion dollars pushed into the markets of QEI and QEII. Like a good team player sitting on the bench telling the coach he’s ready to go in if the game got out of hand and was needed, Bernanke said the Fed is ready to act if necessary.
Stocks shrugged off the news, bad for them as QE means more money for investors to load up on stocks, but rebounded nicely when China let them know that it was going to be undergoing its own version of a stimulus program dropping their interest rates which should lead to yuan pouring into their government controlled markets.
Banks received some bad news from the Fed as it voted unanimously to raise the capital requirements for all banks from the current 2% to 7% phasing in between January 2013 and the end of 2018. This increase in capital requirements reduces the funds banks have to lend and will require banks to increase their lending margins, i.e. interest rates, to retain the necessary liquidity to meet the Fed regulation, known as Basel III. Depending on a bank’s current financial situation it may need to start raising its margins to meet the initial Basel test, such a move could put the bank in jeopardy if it creates an uncompetitive situation that results in loss of customers and revenue. On the other hand once one bank reacts to the rules and raises rates and fees others may follow, similar to when one airline raises ticket prices and others follow. Time will tell.
Rates for Friday June 8, 2012: Rallies on Thursday and today dragged rates back to last Friday’s levels. We are seeing some day-to-day volatility in all markets. Given that rates usually go up like a rocket and come down with a balloon, anyone trying to time a dip is risking more of a loss than they may gain. My recommendation is to lock when you can and not be concerned with shaving a bit off the margin at the risk of losing what you have in hand.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.375% Flat
30 year high-balance conforming 3.625% Flat
30 year FHA* 3.25% Flat
30 year FHA high-balance* 3.5% Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.
* Current rates include credit towards closing costs, call for quote on rate and credit.
Last weekend of the school year for families in the Long Beach Unified School District, summer officially begins on Thursday afternoon. Remember the last day of school when you were a kid? Almost three months of no school, seemed like forever stretched in front of you didn’t it?
Have a great week,
Dennis C. Smith, California Dept. of Real Estate Broker #00966315; NMLS #296660
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597; NMLS #238166
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