Why Mortgage Credit Scores Are Different Than Consumer Scores

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Qualifying credit is a cornerstone of a home loan application. Mortgage lenders use credit scores to help assess a potential homebuyer’s ability to make steady, on-time payments. Given the weight of credit scores in the mortgage market, hopeful homebuyers should absolutely look into their credit before applying for a loan.

We’re fortunate to live in a time when consumers have easy access to their credit scores. Services like Credit Karma and Mint are excellent resources, since they provide free scores and frequent updates. The rise of online credit management tools means that more people are checking their scores than ever before.

Still, many consumers are caught by surprise when they apply for a mortgage and see scores that differ – sometimes significantly — from what they see online. So what gives?

The fact is that when it comes to credit scores, there isn’t just one. There are dozens upon dozens of credit scoring formulas and models, and they can all kick out a different number depending on the type of credit you’re looking to get.

Mortgage-Specific Scores

Credit monitoring tools and services often utilize scoring models that produce more generic or educational scores. To be sure, these scores can give you a good sense of your overall credit profile.

But the type of credit you’re seeking and the specific scoring models that lender or creditor uses make all the difference.

Credit scoring formulas are weighted differently depending on the type of credit you’re seeking, whether it’s a mortgage, a car loan or a credit card. In addition, while the FICO score is predominant in mortgage lending, each credit bureau can use a slightly different formula.

When mortgage lenders check a prospective borrower’s credit, they’ll typically see one mortgage credit score from each of the three credit bureaus and use the median score.

Often, the result is that a score you see online may differ from the score you see when financing a mortgage, which could be different still from a score that an auto dealer or credit card company sees. 

Value of Monitoring

This experience can be disappointing for some consumers, especially those who learn their mortgage credit isn’t quite where it needs to be to qualify. Credit score benchmarks can vary by lender, loan type and other factors.

But there’s still tremendous value in evaluating your credit profile before starting the homebuying journey.

Monitoring sites often provide a look at your credit history. You can also obtain free copies of your credit report from AnnualCreditReport.com. These reports leave out the scores altogether, focusing instead on an extensive credit history. They can help you track your on-time payments and new accounts, and alert you to any suspicious or fraudulent activity.

Issues like previous bankruptcy, foreclosure, tax liens and other delinquencies can throw a wrench into the home loan process. Your credit report will give you a clear picture of any potential issues ahead of time.

If you do opt to use online services that provide “consumer” or “educational” credit scores, know that these are a general indicator of your credit health, and not a single source of truth.

More importantly, tracking your scores will help you understand how your financial decisions impact your credit.

About the Author: Chris Birk is the director of education at Veterans United Home Loans, the nation’s top VA purchase lender and one of the Best Companies to Work For. He is the author of The Book on VA Loans and has appeared in The New York Times, the Wall Street Journal, USA Today, ABC News, CBS News, Fox Business, Military.com and more. Through Veterans United’s Guide to VA Homebuying he educates and equips veterans, service members, and their families throughout the VA loan and homebuying process.