We applied for a loan last year and we were told we needed to improve our scores before we could get approved for a home mortgage. We monitor our scores through Credit Karma and it shows our scores are now in the low 700s which sounds good. However, our scores on Credit Karma were in the mid-600s last year, but the lender stated we had a 550 FICO score. We had a couple of collections we have since paid off, and we paid down our credit cards. I'm not comfortable applying for another mortgage if our scores are still too low. Is there a rule to follow on the difference between a mortgage score and a personal score or what Credit Karma provides?
This is a question I am often asked. While your Credit Karma score is correct according to the formula they use, it is not the same scores or formula used when applying for a mortgage. The only way you can determine your mortgage score is by applying for a mortgage. And while Credit Karma may provide you some satisfaction on your score, it is not a score I would use to gauge your mortgage score since it is not industry-specific.
There are many differences between personal scores, auto scores, installment loan scores, credit card scores and even the "feel good scores" or what Credit Karma provides since that score is usually not utilized by any financial institution. With the rollout of FICO (Fair Isaac Corporation) 09 back in 2014, you can now have 50 or more different scores! But wait, there's more! In addition to FICO, there are Vantage scores and other proprietary credit score models. The type of financing you are applying for (automobile, mortgage, etc.) determines the permissible purpose or the score model the financial institution is required to use.
Credit Karma and other personal score models do not recognize collections under $100. A $30 parking ticket sent to collections can drop your score by 100 points on your mortgage score, while Credit Karma will not include that collection in their calculation. If you pay off a collection, it remains on your mortgage score calculation while it is removed from the personal score calculation. In some cases, your mortgage score may even drop if you pay off a collection. Why? Once you pay off a collection it brings the reporting date forward and it will come across as a new derogatory item.
Each score model will prioritize the information contained in your credit file based on what you are financing. When you apply for an automobile loan, the score will place more importance on the history of any previous auto loans you have on your credit file. The same would apply when applying for a credit card, with a greater emphasis on how you utilize your existing credit cards and payment history.
I mentioned FICO 09 previously, which is the current scoring model released by FICO. While most banks, credit unions and credit card issuers are using this new scoring model, Fannie Mae and Freddie Mac have not adopted the new scoring model. This is important to know since Fannie Mae and Freddie Mac play a significant role in the mortgage industry. This is the reason your FICO score may be higher when applying for a credit card or an automobile loan vs. a mortgage.
Mortgage scores may also vary with each credit bureau since they each have their own scoring models (TransUnion FICO Classic 4, Equifax Beacon 5.0, and Experian/Fair Isaac Risk Model v2). In addition, creditors are not required to report to the bureaus and some may only report to one or two of the bureaus.
Because of the different scoring models, your personal score (what you see when provided with a free score with your credit card, bank account, etc.) can be 50-100 points higher than your mortgage score!
I encourage you to review your credit report annually through www.annualcreditreport.com. You can also purchase your credit score through this same site, however, these are personal scores which again are not used by any industry.
The good news is that all scoring models follow the same basic rules, which is paying your bills on time, keeping your credit card balances to below 30 percent or lower, keeping your existing accounts open to maintain payment history and only opening new accounts when needed.
The most important thing you can do is meet with a lender who specializes in credit. It could save you hundreds on your mortgage payment because you are better prepared to buy a home.
Branch Manager, NMLS
Cherry Creek Mortgage