Consumer Credit Score vs Mortgage Credit Score

Team Simplist
Jan 21, 2021

Think you have great credit? Your mortgage score may not reflect the same level of creditworthiness you’re expecting.

If you’re looking to either purchase a home or refinance an existing loan, you’ve probably been keeping close tabs on your credit score—often those provided for free by an online provider or your bank. After all, your credit score is a massively influential component when it comes to how lenders determine your mortgage rate.

However, once you actually apply for your home loan, you may find that the score you’re expecting is not quite the same as the score your lender is using to determine your creditworthiness. This can be disconcerting and frustrating, but it’s actually totally normal. We’re here to help you understand why that happens, as well as ways you can maximize your mortgage credit score for an easier approval process and potentially, a more desirable interest rate. First, in order to gain a deeper understanding, let’s take a closer look at the key differences between widely used scoring models:

Determining the differences between VantageScore® and FICO®

When you request your free credit score, you’ll usually receive a report that uses your VantageScore to provide broad information and education. This score is generally based on data pulled from one of the big three credit agencies – Equifax, Experian, or TransUnion. The VantageScore is designed to provide a general overview of the factors that influence your credit score so that you can take control of your finances and improve your overall credit picture. And we commend you for doing so!

How the VantageScore works

The VantageScore provides insight into the way the following elements influence your overall score from one of the major credit bureaus. These are listed in their order of importance:

  • Payment history is the most important factor in determining your likelihood of repaying a given loan. Here you will see the negative impact of any late payments, charge-offs, bankruptcies, or foreclosures on your credit record within the last several years.
  • Age and type of credit account looks at the mix of accounts on your record and the length of time that you’ve held those accounts. This category is one to pay special attention to if you’ve been paying off credit cards in preparation for your mortgage application. While this is a great idea, you don’t want to close out the account once it’s paid off, as that will negatively impact the “age” portion of your credit score.
  • The percentage of available credit used is another important consideration. If you have $20,000 of credit currently available to you and you are using half of it, that may make your mortgage lender think that you are overextended. As a general rule of thumb, it’s best to use no more than 30% of your available credit at any one time.
  • Your recent credit behavior will be evaluated and may have an impact—for example, if you recently opened a number of new accounts, it might flag to a potential lender that you are becoming financially overextended.

How the FICO score works

The FICO score includes many of the same elements as the VantageScore, but it includes information from all three of the major credit bureaus.

  • If the scores are different, the FICO score will generally use the median score.
  • If two of the scores agree, the FICO score will use that repeating score.
  • If you are applying for a mortgage along with another person, the lower FICO score will be used to determine your creditworthiness.

Here’s the crucial part, though: there are a variety of different types of FICO scores for lenders in different industries and with different loan types. For mortgage lenders, the FICO score used is generally part of the residential mortgage credit report (RMCR). This includes information from all three bureaus as well as residential, employment, and legal records that are especially useful for mortgage lenders as they make their decisions. The RMCR goes beyond mere credit data to offer mortgage lenders a much more in-depth view of your financial situation.

In addition, while some versions of the FICO score offer more leniency toward certain types of debt, like that associated with medical bills, the FICO score preferred by mortgage lenders is somewhat more stringent. Because home loans are usually large, mortgage lenders tend to be more risk-averse, meaning they are more likely to use more conservative calculations when determining the loan amount, interest rate, and approval potential.

In order to improve your odds of approval and make sure that you are comparing apples to apples, here are some steps you can take when preparing to apply for a mortgage:

  • Ordinarily, you are entitled to one free credit report from each of the bureaus each year. However, to help people stay on top of their finances during uncertain times, the three national credit reporting agencies are offering people cost-free access to their credit report until at least April 2021. If you are planning to apply for a mortgage within the next few months, reach out to each of the individual credit bureaus directly for a copy of your free report. That way, you will know if there are any discrepancies and you will be able to see if the credit scores differ among the three bureaus.
  • When evaluating your information, your lender will pay more attention to recent behavior than past behavior. Thus, paying your bills and mortgage on time is critically important in the months leading up to your mortgage application.
  • If you’re paying off credit cards in preparation for your mortgage application, you might want to consider making one small charge on your oldest cards each month, then paying them off in full. That shows responsible use of credit in the trendline leading up to your application date.
  • Don’t go buying a new vehicle or new furniture for the house you hope to buy until after you’ve closed. Taking on new debt can have a severe negative impact on your debt-to-income ratio and therefore, your home loan approval.
  • If you are buying the home with someone else whose credit is significantly worse than yours, remember that their credit score will be the one that determines both approval and interest rate. You will either want to wait for them to improve their credit score or consider applying for the mortgage on your own. If you do this, however, remember that you won’t be able to use their income to qualify for the loan. You may find that you benefit from a co-borrower’s credit score, and additional income, or neither.

Simplist offers a range of options for all types of borrowers. With 50,000 mortgages from top lenders, a streamlined online application, and a designated Simplist loan expert on hand to serve as a guiding light in your mortgage journey, you’re sure to be more informed and better prepared for every step of the process.

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