Have you ever been confused after receiving your credit score of 752 one week, then to find out it has dropped the next to 725? This is the common complaint I hear when first discussing credit with my clients. The reason for the confusion is there are many different types of credit reports. In the mortgage world, we only use FICO scores which are reported by the 3 bureaus – Experian, Equifax and TransUnion
The type of reports vary depending on the end user. The largest seller of credit scores is FICO which is used by more than 90% of the market. FICO stands for Fair Isaac Corporation who developed the score based on risk factors such as payment history, credit utilization, length of credit history, types of credit and credit inquiries.
The other guy, VantageScore, with less than 10% of the market was created by the 3 large reporting agencies. They didn’t think Fair Isaac was so fair when the big 3 have to pay a fee to report a FICO score on their reports.
All consumers are entitled to get a free credit report once a year or if they have been denied credit at this site www.annualcreditreport.com. However the free report does not provide a credit score.
To confuse matters worse, recently Wells Fargo announced they are giving their customers a free credit score. They teamed up with VantageScore to provide a score customized just for Wells to give their customers. Sounds a little sneaky by the largest mortgage lender in America.
The optimum Fico would be 740 or greater for the best interest rate for a conventional mortgage. If you plan on using a FHA loan, then the minimum score is 620. Most lenders require a borrower to have at least 4 trade lines with 2 of those trades lines established a minimum of 2 years. If you are taking out a mortgage greater than $417,000 then most banks will have stricter requirements
When a mortgage lender pulls your credit, you will receive 3 FICO scores from the 3 credit bureaus. The number used will be the middle score. If you are apply jointly with another borrower, then the lower score will be used regardless of the income each person makes.
The bottom line is to review your credit report at least annually to ensure it is accurate. If you are contemplating a mortgage, please see a mortgage consultant early to review your credit history. Any erroneous information on your report, will feel like you holding 2 full time jobs to get corrected. Any disputes on your credit report will hold up a mortgage dead in its tracks as lenders require disputes to be resolved before closing.