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Why Is My Mortgage Credit Score Different?

Posted on June 3, 2020 by Ray Williams (NMLS #216267).

Credit scores are one of the first concerns to come up for prospective home buyers and with good reason. Your credit score will play a significant role in the homes you are able to purchase, and the banks that will lend to you and the mortgage interest rates you end up with. Generally, credit scores are used as a gauge of your past financial activity so that lenders have an idea of how reliable you are as a borrower. Credit card payments, utilization of credit limits, types & number of accounts, overdue/past due bills, and other data is all compiled into a score that is used to give lenders more information about their clients. What you may not know is that credit scores can be different for different purchases. Here are a few of the most important tips to remember when considering your credit score for a mortgage.

 

Different Scores

Apps like Credit Karma are one of the first things that come to mind when you ask the average person about credit scores. Credit scores from websites and apps typically provide consumers with what is called Vantage scores. These credit scores were developed by the three major credit bureaus, Experian, TransUnion, and Equifax, which gather borrowing data on consumers. Vantage scores use an algorithm and a combination of factors like payment history, credit applications, available credit, account balances, and the age and type of credit. Vantage scores are typically easier to get in a short period of time than traditional FICO scores, the most widely known type of credit score. FICO scores were created 25 years ago as a way to help lenders make better decisions, while Vantage scores have been around since 2006. Both systems typically use the traditional credit rating of 300-850 and are used in similar situations. There are some differences between FICO and Vantage scores, as well as different types of each score.

 

Different Uses

The reason there are different types of credit scores is that people borrow money for different reasons. If you apply for a loan to open a restaurant, your bank will use a different type of credit score than if you apply for an auto loan. When applying for a mortgage, lenders tend to use credit scores that focus on your open accounts, current balances, and any delinquent accounts. This is a more narrow focus than you might get with an overall credit report that takes into account everything in your financial history. For example, if you had a good payment history on an account five years ago, that may improve your overall credit score but not your credit score for a mortgage. 

 

Mortgage Scoring Models 

While these scores are all based on your credit, score models and the factors that affect them can be different depending on why your credit is being pulled. In other words, an auto loan credit pull will calculate its score differently than one for a mortgage. It’s the same for consumer vs mortgage scores, and those scores can vary as much as 100 points or more depending on the variables of the credit report.  

 

For mortgages specifically, a report is scored based on the factors that weigh more heavily: open accounts, current balances, derogatory accounts, etc. And good payment history on a closed account is not factored into a mortgage score – only active accounts are. This means that your mortgage score may be lower than what you see in your current credit monitoring applications and website, causing you to pay higher rates in interest. Talk to a professional (like us!) if you’re concerned. 

 

Strategy Remains

The good news when it comes to navigating the world of credit scores is that your strategy is going to remain the same. Credit scores are used by financial institutions to help them make better decisions when it comes to lending for different reasons. Whatever you are hoping to purchase in the future, whether it is a home or a car, you still want to pay your balances on time and avoid overextending your credit. Those are the two easiest ways to ensure a healthy credit score.

Have questions about credit scores? Looking for a mortgage broker in the Denver metro area? We can help. Fill in this form and we will get back to you!

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