Why are Mortgage Credit Scores Different Than What I see when I Pull It?

Why is My Credit Score Different from what the Lender Sees?

I get one of two responses (either shock or Ahhhhhh) after reporting back to potential borrowers what their credit scores are after taking their mortgage application:

1)      Shock  “I just checked my scores on my free app yesterday, I am shocked - they weren’t that high!  Awesome!”

2)      Ahhhhhhh?  “I just checked my scores on my free app yesterday, Ahhhhhhhhh? They weren’t that low, what happened – what did you do!?”

With that, obviously, the common question is then, why is my credit score different when you pull it from where I saw it, literally just (insert time frame here) ago.

This is the explanation to why.  We’ll start with some nerdom and finish with some fried chicken.  So join us on a whimsical journey as we uncover the secrets behind the magical numbers, exploring the nuances, quirks, and the playful dance known as the FICO Mortgage Score.

The FICO Family Tree

First and foremost, did you know there are different types of credit pulls?   Each is unique in the amount of history it looks at, and how it weighs different items as it calculate your score.   Did you know that there are literally over 20 different types of credit pulls (not including what Kredit Karma or those free apps show you)?

Common Components inside each Credit Score Calculation:

1. Payment History - The Foundation:

While ALL credit pulls look at payment history, the Mortgage FICO Score places heightened importance on payment history (its estimated to be at about 35% of the score’s weighting), considering it the cornerstone of the homeownership journey. It aims to ensure reliability in making on-time mortgage payments specifically.

2. Credit Utilization - A Different Perspective:

While acknowledging credit utilization, the Mortgage Score views it through a broader lens, recognizing the management of a mix of installment and revolving debts in homeownership.

3. Debt-to-Income Ratio - A Solo Indicator:

In the realm of mortgage lending, the debt-to-income ratio takes center stage, indicating the delicate balance between debts and income. A lower ratio is crucial for a favorable Mortgage Score.

4. Length of Credit History - The Timeless Element:

The Mortgage Score appreciates the depth and length of your credit history, understanding that individuals with longer financial journeys have likely honed their credit profiles over time.

5. New Credit - A Subdued Consideration:

While acknowledging the importance of responsible credit management, the Mortgage Score considers new credit activity in a more subdued manner, recognizing the delicate balance required for homeownership.

6. Bankruptcy and Foreclosure Events:

A Mortgage Score looks as far back as 7 years for both Chapter 7 and Chapter 11 Bankruptcy (other models do not look this far back).  If there is a derogatory event such as this – it becomes a major driver in bringing the score down.

7. Collections:

Personally, I’ve seen something as miniscule as a forgotten annual fee on a forgotten credit card affects a credit score by nearly 80 points on a Mortgage Score.  Something as silly as forgetting to pay this once-a-year fee on a credit card that doesn’t get used otherwise can literally be the difference in qualifying for a mortgage or not.

Uniqueness of the Mortgage Score vs. other types:

I’ve always imagined the FICO as being Kentucky Fried Chicken’s recipe.  We all know what herbs and spices are used, but can only estimate the ratios of each.  If TransUnion, Experian, and Equifax told us how exactly the algorithm worked, they’d be out of business.

When a Credit Report is pulled for a Credit Card, it’s the same herbs and spices – but weighed differently than what is used for a Car, Boat, RV, Mobile Home, or house.  And that is why your Kredit Karma or FreeCreditReport.com Credit Scores from the three bureaus are different than the ones I see when I pull it for your mortgage application.  We are simply eating different pieces of fried batter on the same pieces of chicken.

Imagine it this way (listed from light to deep):

-          Free Apps:  This is just the inside cover summary of a much deeper and interesting 300 page novel to your credit history.  Because it’s just a 2 paragraph summary, there is no way for it to deep dive into each page.

-          Unsecured debts:  Because there is nothing to repossess, the only action a creditor can take is to send you to collections.  The information a creditor here is more geared towards how you do in the ‘honor system’ of keeping your promises to paying things like credit cards and medical debt.

-          Installment Liabilities:  This is yet an even deeper level of information looked at, because the lender does NOT want to go through the expense of having to repossess the asset.  Something like a car or boat is usually upside down (value vs. amount owed) when its repossessed as well.  This looks further back in time and at more information that a Credit Card Credit Pull

-          Mortgage Level Pull:  This is the deepest level of information that is looked at.  An Encyclopedia Britannica of information going back multiple years.  The reason?  A home is usually the largest thing that we’ll ever buy.  It’s also the toughest to take back as a lender.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.

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