ALL YOU NEED TO KNOW ABOUT CREDIT REPORTS, FICO SCORES & WHAT HOME LOAN LENDERS LOOK FOR
By: Lourdes Cuervo, Cornerstone First Mortgage.
In order to determine your credit risk, lenders require a copy of your credit report from the three major credit reporting agencies – Experian, Equifax and Transunion. In addition to the report itself, lenders require that each of the credit reports have a FICO® score. Credit scores range from 300 to 850. All mortgage products (FHA, Conventional, Jumbo or Porftolio Products) have minimum FICO® score requirements in order to qualify for the roduct). As an example, standard conforming loans require a credit score of at least 620, FHA mortgages have lower requirements but if you want the BEST rate, you need a score of 740. FICO® scores are also used to determine the interest rate and the loan-level-pricing-adjustment add-ons which apply to the mortgage loan product.
WHY ARE FICO® SCORES USED?
FICO® scores are used by lenders to predict (based on past credit payment history, lenght of credit history, percentage of credit utilized and other factors), how likely you are to pay back a loan on time. Scores are determined by comparing the information on your report with the performance and risk patterns of thousands of other credit reports and assigning levels of risk
FICO® scores are thus used by lenders as a tool to help predict the future level of risk that your profile represents. The higher FICO® number, the lower the risk.
HOW ARE FICO® SCORES DETERMINED AND WHY DOES EACH BUREAU HAVE A DIFFERENT NUMBER?
Each credit bureau has its own “scoring mechanism”. That said, credit scores are higher when you have no late payments, when you reduce credit balances, when you limit new credit and when you have a well established credit history.
In addition to the proprietary “scoring mechanism” the other reason why not all of the credit bureaus have the same data is that reporting by creditors is voluntary. A particular creditor may report to one and not the other two.
WHAT IS A TRI-MERGE CREDIT REPORT?
A tri-merge report is a report unique to the mortgage industry. It is a single report that merges the data from all three credit reporting agencies into a single report which contains the FICO® scores of all three.
WHICH OF THE THREE FICO SCORES DO MORTAGE LENDERS USE?
Mortgage lenders will use the MIDDLE FICO® score to determine if you qualify and at which rate. If you’re applying for the loan with a co-applicant, the lower middle score of the two (or more, if applicable) will be used.
GETTING YOUR CREDIT REPORT FREE OF CHARGE
www.AnnualCreditReport.com is the only place where you can obtain the free credit report guaranteed by federal law. It will not contain the FICO® scores, but if you are just starting to consider the probability of purchasing a home, it is a good place to start so that you will be able to ascertain if any of the data contained in any of the credit reporting agencies is erroneous and request for it to be corrected before you officially apply for a mortgage.
GETTING YOUR FICO SCORES FREE OF CHARGE
Many places on the internet offer to give you your FICO® scores for free but BEWARE. READ THE FINE PRINT!! Most of these services will require you to sign up for credit monitoring services and will begin to charge you monthly fees until you cancel – resulting in fees exceeding the cost of a credit report with FICO® scores many times over!
There is an app which is free but their models and formulas vary from those of the three major credit bureaus. The scores you see are not the ones that mortgage lenders use. It is certainly a good place to start if you’ve never looked at your scores and want to get a ball park figure, – but it will not provide you with the necessary information to get officially pre-qualified. The app is www.creditkarma.com. Reviews regarding the app can be found here: https://www.consumeraffairs.com/online/credit-karma.html
Nonprofit credit and financial counseling providers are now able to offer free credit scores to the people they serve. You can find a list of approved counselors and counseling agencies by State and judicial district. Go to https://www.justice.gov/ust/list-credit-counseling-agencies-approved-pursuant-11-usc-111
PURCHASING CREDIT REPORTS WITH FICO SCORES:
You can obtain your credit reports with FICO® scores directly from one of the major reporting agencies. Typically they will charge you more for the service than most lenders would (since lenders buy credit reports in bulk). You can get your reports at: https://www.myfico.com/products/three-bureau-credit-report/ or at https://www.experian.com/consumer-products/experian-equifax-transunion-credit-report-and-score.html
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