As most have come to realize, borrower credit scores are much more critical now than ever before. It is important to know exactly how credit scores are used in the mortgage business, and to know how your scores will determine your interest rate.
There are 3 major credit bureaus: Trans Union, Equifax and Experian. Each bureau has a credit file with your information – unless you have never used or applied for any credit. The bureaus also maintain what’s known as a “credit score” for you. This score helps creditors determine whether to extend new credit to you, how much credit to extend, and what rate you will have to pay.
Some creditors will look at your credit report and scores from just one bureau and some may access your file from all 3 bureaus. 99% of the time, the bureaus will have different credit scores. However, the scores are usually within a similar range. When they vary by a lot, it is because one bureau has information reported that another bureau might be missing.
In the mortgage business, the credit file MUST be pulled from all 3 bureaus. That means we will end up with 3 different credit scores. Your mortgage approval and interest rate will be determined by what we call the “middle” score. So, if your 3 scores are 770, 720, and 710, we will base everything on a score of 720. No getting around it.
Here’s a scenario you should be aware of.
When there are 2 applicants for the mortgage, we will then have 6 credit scores – 3 for each borrower. Let’s use the following as the credit scores: Borrower A – 704, 690, and 650. Borrower B: 735, 755, and 750. The score which will be used for qualification and interest rate is 690. When we have 2 or more applicants, we must use the lower of the 2 middle scores. This does NOT benefit the applicants in this example.
Solution: If there is any way to get them qualified using the income and credit of Borrower B alone, then we can look at that as an option. The savings in the interest rate would make it very beneficial.
Have questions? Just ask away.
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