Question of the week: Why is credit score in your report different than score I have from on-line report?
Answer: Many mortgage applicants are surprised when they receive a credit report from a lender and the score is lower than the score they received from a their credit card company or a free on-line service. Sometimes the score from the mortgage company is significantly lower than the free on-line score.
Why is this?
Credit scores are derived from models that use algorithms weighing five main factors:
- Payment history, the most important factor, as missed payments, even one, will have a negative impact on a credit score. Payment history is approximately 35% of credit scoring.
- Amounts owed, especially as a percentage of amount available, your credit utilization ratio, is the second biggest factor. Outstanding balances that are a high percentage of the amount of available credit have a negative impact on credit scores. This factor is approximately 30% of your score.
- Length of credit history has about a 15% impact on your credit score. The credit history algorithm factors your oldest credit accounts as well as your newest, and the average age of the accounts. If you have a lot of very new accounts this can negatively impact your score.
- Credit mix, having a mix of different types of credit can help your credit score. Having a mix of credit does not mean a Capital One Visa, a Delta Mastercard, an American Express card and a few department store cards. Credit mix is having credit in different categories such as auto, student loan, credit card, mortgage, installment loan accounts. The more categories of credit you have the better your credit score as credit mix is about 10% of scoring.
- New credit, as mentioned above, can impact your credit score. One reason is because when you obtain new credit you typically have what are known as “hard inquiries” on your report. Too many hard inquiries, especially for revolving accounts, and new accounts has a negative impact on your credit score. This category is also about 10% of the scoring model.
The purpose of a credit score is to provide a credit provider with an assessment of potential risk. You can different scores from the report provided by your credit card company than from the report used for a mortgage application because the amount of risk to the credit card company compared to the mortgage company.
Using the scoring models above, a scoring model for a mortgage applicant will put a lot more weight on the missed payments and outstanding balances than the scoring model for a credit card.
Why? Because mortgage lenders have a lot more at risk than a credit card company, hundreds of thousands of dollars more at risk, higher monthly payments at risk, and considerably higher costs should a borrower default.
Regarding the latter, this is especially true in states, such as California, with non-recourse mortgages; states when mortgage lenders cannot sue borrowers for losses incurred when a loan goes into foreclosure. When a mortgage goes through the default and foreclosure process, the cost to the lender is about 25% of the balance. When a consumer defaults on a credit card balance the creditor often has recourse in small claims court to recover the balance. If the creditor does not choose to go to court to collect, the amount charged off remains on a credit report for up to seven years.
If you apply for a mortgage, an auto loan and a credit card on the same day, there is a good chance that your credit scores will be different for each application, likely going lowest to highest in the order listed above.
Not only do different categories of creditors have different scoring models, so do the different credit agencies, Experian, Trans Union and Equifax. Because of this the mortgage industry uses a “tri-merge” credit report, the report is a merging of information collected from all three of the major credit bureaus and their respective scores. It is not unusual for us to see a difference of up to 50 points between the lowest and the highest of the three scores.
For this reason, the industry uses the middle credit score for single applicants and the lowest middle score of multiple borrowers. For instance, if I have credit scores of 739, 719 and 745 and Leslie has scores of 775, 782 and 771, our file score will be 739, my middle score. This is the score that will be used for determining the rate and cost of the mortgage for which we are applying, which will be higher than if we could use Leslie’s middle score of 775.
A final note, many people with some challenging credit issues delay speaking to us about qualifying for a mortgage, “until we can get our credit cleared up.” When I hear this, I ask what needs to be cleared up and what is their intended process. My intention is to get the client to let me pull a credit report so I can analyze the report through the filter of mortgage underwriting guidelines. With a tri-merge report I can determine what steps can be taken and potentially shorten the path to homeownership. The analogy I use is that if you want to get in shape you can set your own exercise routine, but those who work with a trainer typically get into better shape faster than those doing it alone.
If you, or someone you know, would like to purchase a home but feel their current credit situation will prevent them from doing so, please contact me so we can obtain a credit report and determine the best steps to take to get their credit in shape.
Have a question? Ask me!
Maxwell Smart, that’s what is thought today when I read the August jobs data this morning. After over one million new jobs were added to the economy in July, the expectation was for approximately 720,000 new workers in July. Earlier today the Labor Department announced that 235,000 new jobs last month, even those not so great at math can see this is significantly lower than expectations. Also in the report was the unemployment rate, measured by those seeking employment, dropped from 5.4% to 5.2%, and that hourly earnings increased 0.6% in August and are up 4.3% from August 2020—keeping pace with inflation.
Now what? Last week in the economic section of the WR&MU, we discussed the Federal Reserve and the possibility it will taper its asset buying program (Quantitative Easing) before the end of the year. A primary factor in if the Fed will taper, thus putting more upward pressure on rates, is the strength of the labor market. Does today’s jobs report change the conversation as it shows slowing growth in jobs? Or…are there some extenuating circumstances to cause the August report to be somewhat discounted by the Fed? Two factors that may cause the jobs report to have less of an impact than expected. One, some experts feel the disappointing miss on the total number of new jobs is the result of many companies freezing new hires, especially for customer forward positions, due to the delta variant of Covid and the surge in late July and early August. While there are still hot-spots around the country with high positive test results and hospitalizations, many areas are showing these numbers plateauing and starting to decline, meaning hiring may resume in September. Another factor is the “August effect.” August is traditionally a vacation month and many small business owners, human resource directors, executives, and others who complete the government job surveys are not around to fill in the boxes. So not only is August a traditionally a vacation month, but it is also traditionally a bit of a squirrelly month when it comes to data collection. With many people not being able to vacation last summer, we have seen a tremendous jump in vacationers this summer.
Rates for Friday September 3, 2021: Ordinarily a big miss in a major economic report would have an impact on rates, in the case of the August employment numbers the miss to the down side would put downward pressure on rates. However, as we have seen over the past year, ordinary reactions to economic data have not impacted interest rates as expected in traditional economic models. Such is the case today at investors shrug off the data and speculation as to what the Fed may or may not due as a result. That said, our mortgage analysts are forecasting a potential bump in interest rates sometime next week based on the markets.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:
30 year conforming 2.625% Flat
30 year high-balance conforming 2.875% 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 with 740 FICO score for purchase mortgages.
No more wearing white and the pool is closing soon. Those were the traditions due to Labor Day when I was growing in areas of the country that experience four distinct seasons.
Since 1994, Labor Day weekend has signified another year for Leslie and I as that year, we were married on Sunday of the three-day weekend. Tomorrow will mark twenty-seven years, that have seen two kids, three dogs, two homes, tens of thousands of miles on drive trips, and countless laughs. I won the lottery, not from a ticket bought at a liquor store, but from meeting a young lady who was drawing a sign for a charity event while sitting on the floor of an escrow company with a great sense of humor.
She’s needed it often over the past two plus decades.
Have a great week,
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog