By Nakiea “Nikki” Dade, REALTOR®
Many people are surprised to learn they don’t have just one credit score. In fact, you have several credit scores that are calculated using different formulas for different types of lending. The score you see when you check your credit online may be the one a credit card company or auto lender uses, but it is not necessarily the score a mortgage lender will use.
If you are planning to purchase a home, knowing the difference between the types of credit scores and how they are used can help you stay focused on the best way to prepare your finances and avoid any delays.
What is a FICO Score?
A FICO score is a three-digit number that predicts how likely you are to repay borrowed money based on the information in your credit report. Developed by the Fair Isaac Corporation (FICO), it is one of the most widely used credit scoring systems in the United States. Banks, credit card companies, auto lenders, mortgage lenders, and other financial institutions use FICO scores to help determine whether to approve a loan or line of credit and what interest rate or terms to offer. Different lenders often use different versions of the FICO score depending on the type of loan being evaluated.
What You See: FICO 8 Scoring Model
The standard “FICO 8” is the newer scoring model that is most frequently referred to and used to obtain a credit card, auto loan, etc. FICO 8 is used by credit card companies and is more focused on credit card utilization and recent activity. Credit card utilization is the ratio of the current amount of debt used to the total amount of credit available. It is a snapshot that aligns with your monthly payments.
FICO 8 scores are more easily attainable through the three (3) major credit bureaus, Experian, Equifax, and TransUnion. It is focused on a shorter span of activities than your overall history and debt.
What Your Lender Sees: Mortgage Credit Scores (FICO 2, 4, & 5)
You may think your FICO 8 score is also the one your lender will use when they qualify you for a mortgage, but it is not. Mortgage companies still use older scoring models—FICO 2, 4, and 5—typically referred to as the “Mortgage Credit Scores.”
FICO 2, 4, & 5 are mostly focused on payment history and overall debt. FICO 2 is the score provided by Experian, FICO 4 is from TransUnion, and FICO 5 is from Equifax.
Lenders will use your mortgage credit scores to determine what loan they can offer you, including your interest rate and the amount you can borrow. Learn more about how interest rates affect your loan.
How Your Credit Scores Are Used
With multiple scores being reviewed by your lender, it is important to note your lender will use the middle score of the three to determine your loan. If your scores come back to the lender as 650, 673, and 677, your lender will use 673 for the purposes of their calculations.
Mortgage companies are more concerned with a consumer’s long-term behaviors, the strength of the credit profile (the number of revolving & installment accounts) and debt to income ratios. They depend on past trends to predict future practices. Lenders are extremely conservative when lending because it minimizes their exposure to risk and liabilities.
Remain Lendable
Visibility maintains your accountability. If you maintain access to your credit profile, you can manage errors in your report, track progress, or catch potential fraud, to ensure you get the best terms when applying for a loan or another line of credit.
There are several reputable credit reporting platforms available for use, but you are also able to get a free credit report each year from the three main credit bureaus. Learn more about credit reporting and credit freezes to protect your information. If you choose to sign up for a credit service, be sure to do your due diligence before signing up with any provider and understand which scores you are being shown.
Seek Professional Guidance
Your real estate professional will normally have a recommendation for a lender to schedule a consultation to assess your current situation, or you can use another lender you already know or want to work with. It is highly recommended to use a licensed professional to map out the best plan of action to ensure your road to home ownership is success. Working with a lender early will give you the best understanding of what your budget may be, help you with any steps you can take to improve your credit profile, and start the process of getting pre-approved.
