When is your credit score not actually your credit score?
How about when you’re applying for a home loan.
I can’t count how many times a frustrated veteran has come to me demanding to know why the credit score they paid to obtain doesn’t match what a lender is telling them. Prospective homebuyers are often confused, chagrined or downright catatonic when they learn mortgage lenders see a different score than they do.
The reality is lending agencies rely on unique scoring formulas weighted for mortgage-related factors. It’s a risk-hedging move designed to help banks better assess whether you’re a good candidate for the financial responsibility of a mortgage.
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That’s often a frustrating revelation for potential borrowers.
The consumer-centric score you might purchase from an entity like FICO can still provide a solid sense of where you stand. But its limitations are especially glaring for borrowers on the edge.
You probably won’t know the exact scores used by a particular lending agency until you’re either approved or denied for a mortgage. That’s one more reason it’s so critical to stay on top of your report and be responsible with credit.
Credit scores aren’t monolithic. FICO’s model is the predominant score among creditors, but each of the three major credit bureaus uses different methodology and includes different consumer information. For example, one of your creditors may report to all three agencies, while another only reports to one.
The credit bureaus – Equifax, Experian and TransUnion — will gladly sell you a look at your three-digit credit score. But what you’ll get is considered a “generic score,” which is more of a blunt educational tool than a sharp data point.
When mortgage lenders conduct a hard credit pull, they see three scores that take into account your personal history with home loans. These numbers can be higher or lower than the generic score you shelled out $20 to see.
Lenders will typically use those three scores as a range and fixate on the middle one.
In the current economic climate, VA-approved lenders are generally looking for at least a 620.
But even the clearest explanation falls short when you’re talking to a military member who just learned his generic 630 score is a 610 in the mortgage lending world.
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Generic Scores Still Matter
Despite the discrepancies, it’s still important for prospective homebuyers to scour their credit report and investigate their generic scores. This is a number that will govern not just your ability to qualify for a loan but the interest rate you’ll pay over the life of the mortgage.
Consumers can use their generic score as a soft guide to calculate what they can afford. A solid generic score is routinely indicative of your industry-specific one. Here’s what FICO says on the matter:
“Checking your credit scores from a trusted seller can often serve as a guide for pointing you in the right direction. If you pull your credit score from a reputable source and find that you have a very high score, then more often than not, you’ll have a good FICO score as well.”
If you want to buy a home and find your generic score lacking, consider it a signal that it’s time to put some effort into boosting your score. Veterans and military borrowers can also contact the Department of Secondary Approval at Veterans United Home Loans for help (Disclosure: I work for Veterans United). This wing of the country’s top dedicated VA lender helps any military member or veteran develop a plan, with no strings attached, to boost their score and get on the path to loan prequalification.
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This story is an Op/Ed contribution to Credit.com and does not represent the views of the company or its affiliates.
Image: Ksayer1, via Flickr