Why Is My Credit Score Lower for a Mortgage?

credit score word graphicHave you checked your credit score recently? We always advise that you check your credit score before making a big purchase that requires that you borrow money. But, often times there will be a credit score gap, which happens when the credit score you receive doesn’t match the score your lender pulled during the loan approval process. This happens quite often when applying for a mortgage. So, why is your credit score lower for a mortgage? And, which FICO credit scores do mortgage lenders use? Read on and we’ll explain the difference between your mortgage credit score vs. your consumer credit score.

What’s the Difference Between Educational and Lender Scores?

When an individual goes to check their consumer credit score they will typically start with a free online service. These services pull your credit information from one of the three major credit reporting bureaus — Equifax, Experian, or TransUnion. The score that is returned is a VantageScore, also called an educational score. On the other hand, your mortgage lender will pull a FICO credit score, which includes credit history from all three of the credit bureaus together.

Here’s are the main difference between your VantageScore and the lender’s FICO score. Because a VantageScore is free, it’s a more generalized result, versus a FICO score which comes from a paid monitoring source. Additionally, not all your creditors report to each of the three credit bureaus, which means a score that comes from a single source may not show your entire credit history. This can skew your score.

The final and very important difference between the two is the scoring range. VantageScores range from 501 to 990, while FICO scores range from 300 to 850. As you can see, a VantageScore will almost always be higher than a FICO score.

Which Credit Score is Used for a Mortgage?

When a mortgage lender pulls your FICO score, they are actually pulling several variations of your score (there are as many as 16 FICO variations!). They concentrate on FICO scores 2, 4, and 5. Together they make up the Residential Mortgage Credit Score (RMCS). In addition to your credit report, the RMCS also pulls employment and resident history, as well as legal records. This score is tailored to mortgage lenders because it’s specifically focused on your ability to repay a home loan, versus an auto loan or credit card.

Since your FICO score is comprised of scores from each of the three credit bureaus, your lender will use the scores in this way:

  • If all three scores are different, they will use the middle score.
  • If two of the scores are the same, they will use that score regardless if the third score is higher or lower.

If there are two borrowers who are applying for a mortgage, the lender will take the steps above for both individuals. The lender will then use the lower of the two credit scores for the loan approval process.

Improving Your Mortgage Credit Score

Your credit score can greatly affect your mortgage options — everything from the interest rate you’ll have to pay to the length of your loan and any additional fees you’ll be charged. If your mortgage credit score is lower than you expected, there are steps you can take to improve it.

  1. Pay down your debt. Starting with high-interest debt is a smart strategy. Put as much extra money as you can each month towards paying off the loan or credit card that carries the highest interest rate while making the minimum payments on everything else.
  2. Make your payments on time. The biggest factor that goes into calculating your credit score is your payment history, so making payments on time can have the biggest impact. A current payment history of on-time payments carries more weight than a past history of missed payments.
  3. Don’t take on any new debt. If home buying is a priority, then put any plans of buying a new car or applying for a new credit card on hold.

The mortgage experts at Diamond can answer all your questions about your credit score and how it may affect your home buying journey. Visit our Mortgage Center for additional help and guidance.

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diamond university logoThis article is part of Diamond’s ongoing financial education program.

The views, opinions, and ideas articulated in this blog are just that, and should not be construed as financial or legal advice. The writers of these blogs are educated on the topics they are writing about, but they are in no way licensed financial advisors or registered investment advisors. Diamond Credit Union is not responsible for any actions a person may take as a result of the information they read in one of our blogs.