The world of credit can be incredibly confusing. There are three different bureaus who will score you based on innumerable versions of countless models. However, if you’re applying for a mortgage, you should be in-the-know so you can maintain and improve your score.
This blog post will let you know the difference between the scores consumers see and the ones used for your mortgage. Knowing how this works will help you get your scorecard in shape and get you ready to apply.
FICO® Vs. VantageScore®
The first thing to understand when evaluating your credit is that there are two competing standards in terms of risk analysis models: FICO® and VantageScore®. Let’s go over how these models work.
Understanding Your FICO® Score
There are five areas that impact your FICO® Score. Let’s break these down along with the weight of each category.
- Payment history (35%): Payment history plays the biggest role in your score, and it’s also the easiest to explain. If you make your payments on time, that helps your score. If you pay late, it hurts your score. It’s worth noting that a payment isn’t reported late by the credit bureaus until it’s 30 days past the due date. If you have accounts that have been placed in collections or charge-offs, these are also considered bad for your score. Finally, bankruptcies and foreclosures are also factored in here. The effect of these negative marks does fade over time, though it may take several years.
- Amounts owed (30%): In this category, the total amount you owe across both revolving debts (like credit cards) and installments (like mortgages, car loans and personal loans) is a factor. The thing to really pay attention to at this point is your credit card usage because it’s the one thing you can control on a monthly basis. You want to keep your balances low relative to your overall credit limit. This ratio affects your score. The best thing you can do is buy only what you can afford and pay it off every month. In addition to being better for your score, you won’t have to pay interest. The reason we’ve focused heavily on credit cards is that your installment loans tend to have to do with things you need. Student loans were good for school, and you need a roof over your head. A lot of us need a car depending on the state of public transportation in our area. On the other hand, credit cards are one area where discretionary spending tends to be placed.
- Length of credit history (15%): The more time you’ve spent building your credit history, the better it will be for your score. If you’ve had years of good history, lenders have more to go on than for someone who’s just getting started with credit. However, it’s not rated so highly as to avoid deeply penalizing those who are new to credit.
- Credit mix (10%): Ideally, lenders want to see you can handle having a decent sampling of both revolving and installment credit. This shows you understand various types of financing. However, those with a younger credit history tend to have just a credit card or two. That’s OK because this category isn’t a huge factor in the formula.
- New credit (10%): Each time you apply for a new credit card or loan, your credit score goes down a little bit temporarily. The thinking here is that if you need to apply for new credit or a loan there’s always the chance you could be overextending yourself financially. If you make your payments on time (among other good habits), your score should be back where it was in no time.
The traditional FICO® Score has a range of anywhere between 300 – 850. Anything over 670 is considered a good score. There are also special versions of your credit score that go from 250 – 900 for credit cards and car loans.
This isn’t universal, but generally when lenders take a look at your credit score, the one they’re paying attention to is from FICO®.
VantageScore®is the younger of the two competitors, but it differentiates itself by having more information that’s consumer friendly, aiming for better credit education. Services like Rocket HQSM1 use VantageScore® to provide actionable information on how someone can improve their credit based on the information in their report.
Although they don’t break down exactly how each of the six factors play into the formula, they do talk about them in terms of level of influence. The categories are weighted as follows.
- Payment history (extremely influential): As with FICO®, VantageScore® places in the heaviest emphasis on your payment record. On-time payments help. Late payments, charge-offs, collections, bankruptcies and foreclosures all contribute to lower scores.
- Age and type of credit (highly influential): This combines a couple of categories from its competitor. Here, they’re looking at both your credit mix (between revolving and installment accounts) as well as how long you’ve maintained credit. One thing you never really want to do is close your oldest credit card because your score and both formulas are tied to the age of your credit history. The one time you might think about doing this would be if it’s a secured card you’re paying a fee for without getting rewards or cash back and you’ve opened a couple of other cards since.
- Percentage of credit limit used (highly influential): Because behavior with existing credit cards is a big predictor of future credit risk, there’s a special category broken out within the VantageScore® Again, you want to keep your credit utilization (i.e., the balance you carry relative to your overall credit limit between all of your accounts) as low as possible. It’s recommended that you keep this under 30%.
- Total balances/debts (moderately influential): In this category, both your credit balance and existing debts are looked at, which helps give you an idea of your overall financial picture. The lower the balances are on each of your debts, the better.
- Recent credit behavior (less influential): This takes a look at how recently you opened new accounts. You don’t want to open a bunch of new accounts quickly because it could be a sign of overextension.
- Available credit (least influential): This factor has to do with the amount of credit being used compared to the amount you actually have available to you. You should only use what you need when it comes to credit.
The most recent versions of the VantageScore® formula follow the same 300 – 850 range as the main FICO® Score. Although it’s not the score preferred by most lenders, some version of the VantageScore® formula is the one that’s widely available to consumers through credit and finance sites like Rocket HQSM. While the formulas aren’t exactly the same, VantageScore® provides actionable information on the trend of your credit and where you can improve.
Consumer Credit Reports
Once you understand the formulas, the next thing to know is that consumers and mortgage lenders often have access to two different sets of data when it comes to credit reporting. Let’s go over the consumer side first.
Consumer Credit Reports And Scores
On the consumer side, you can generally get access to your VantageScore® credit report and score from one of the bureaus on a regular basis. For instance, you can get your free VantageScore 3.0® report and score from TransUnion® and Rocket HQSM once a week.
There are two other credit bureaus in addition to TransUnion®: Equifax and Experian. You may be able to get access to their reports on a regular basis if you have bank or credit card accounts. These services can sometimes also give you access to your VantageScore®.
By law, the credit bureaus have to give you access to at least one credit report from each bureau every year. You can access these at AnnualCreditReport.com. Because there’s a chance each bureau doesn’t have access to the same information, it’s a good idea to pull a report from all three if you plan on applying for loans in the near future. This way there are no surprises and you have the opportunity to correct any inaccurate information. On the other hand, if you’re not applying for a loan anytime soon, you should pull one from each bureau every 4 months.
In any case, it’s important to remember that when you’re viewing these reports, you’re only looking at a single source of information. This is in contrast to mortgage lenders, who look at several sources before they accept you for a mortgage.
Special Credit Report Information
Traditional credit reports are concerned with information specific to your history with credit accounts and any loans you may have. However, there’s recently been some push to account for other regular expenses that aren’t necessarily loans or credit accounts but nevertheless show lenders a prospective client’s level of responsibility.
One of these new services is Experian Boost™. By connecting your bank account with Experian, they’re able to see when you’ve done things like pay your water and electric bills in addition to things like your cable and cell phone bills. Using this information, the bureau can give you a more holistic picture of your finances and raise your credit score if you’ve been making the payments on time.
These haven’t been picked up widely across lending industries yet, but it’s something to keep an eye on for the future.
Mortgage Credit Reports
While consumers only ever see the information from one bureau on a report, mortgage lenders will look at your information from all three bureaus whenever possible. There are a couple different mortgage credit reports they can use to give them a look at all three scores and information from all credit reports: a tri-merged credit report and a residential mortgage credit report (RMCR). The latter is preferred by mortgage lenders and investors, and it’s what we’ll focus on here.
In addition to combining information and giving lenders access to scores from all three bureaus, the RMCR contains some information that lenders pay special attention to when determining whether you qualify for a mortgage approval.
If you’re on the edge of approval, one thing mortgage investors like Fannie Mae pay special attention to is trended credit. If all other things are held equal, you’re more likely to be approved if you pay off most or all of your credit card balance rather than if you just pay the minimum payment every month. That’s just one example of the information visible on the RMCR.
Understanding the Mortgage Credit Score That Counts
Being that the reports mortgage lenders get give them access to all three credit scores, which one counts? In the case of your mortgage approval, the median score counts.
In the case of multiple borrowers, the score that counts is the lowest median credit score of all borrowers on the loan. If you had credit scores of 710, 690 and 680 between the three bureaus and your spouse had 690, 670 and 650, 670 would be the score that counted.
In the event that two of the three scores are the same, it’s the repeating score that counts. If for some reason only two bureaus report scores, the lower score is used.
It’s for this reason that, in some instances, people will choose to leave one person off the loan in order to qualify. The downside to this is that you can’t use the other person’s income to help get approved. In either case, the mortgage has no effect on who’s on the title and deed.
Which FICO® Version Do Mortgage Lenders Use?
We mentioned above that FICO® is the preferred score for mortgage lenders. But there’s another complication: There are nine different versions of that score. Which one gets used?
The exact answer to that question will depend on which mortgage you’re getting, but let’s look at an example. Fannie Mae and Freddie Mac both buy conventional loans and they have identical guidelines in terms of credit score formulas. These are the models they use:
- Equifax Beacon 5.0
- Experian/Fair Isaac Risk Model V2
- TransUnion® FICO® Risk Score, Classic 04
The models have the branding of the credit bureaus, but according to FICO®’s information, they correspond to those versions of the FICO® model (e.g. Equifax Beacon 5.0 is analogous to FICO® Score 5.
Older versions of the FICO model are used in mortgage lending because newer versions tend to more easily forgive certain types of collections including medical ones. Because mortgage loans are by nature very large, mortgage lenders and investors are a bit more risk-averse, preferring to use models where collections and charge-offs play a bigger role in your score.
The takeaway here is that if you have collections or charge-offs on your credit record, your score may be lower when you try to apply for a mortgage than it is in simulators available online.
Hopefully this helped you learn a little more about the difference between consumer-facing credit scores and the ones lenders have access to. If you’re ready to apply, you can do so online through Rocket Mortgage®by Quicken Loans® or give one of our Home Loan Experts a call at (888) 980-6716. If you have any questions for us, you can leave them in the comments below.
1Quicken Loans® and Rocket HQSM are separate operating subsidiaries of Rock Holdings Inc. Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation, and applicable legal and regulatory requirements.
If so, subscribe now for tips on home, money, and life delivered straight to your inbox.