Whenever you go for a mortgage, the credit scores will be taken into consideration as to whether one qualifies for the mortgage or not, and the interest rate that will be offered. Keep in mind that there are several types of credit scoring models in existence, and thus, your mortgage credit score could be lower than the ones you receive from other sources. Read this article to find out why this happens and what you can do about it.
Several credit scoring models
The credit score model primarily used in the consumer credit industry is known as FICO. This gives a scale of 300 to 850. However, most lenders actually employ a variant of FICO that is tailored for mortgage origination known as FICO Mortgage Score. This also varies between 300 and 850. For example, there is FICO, but there is also VantageScore, which has actually risen to prominence in recent years. It also has a range of 300-850.
And while you can look it up in other places and it says 720, while you are applying for a mortgage you will see that your FICO score specialized for mortgage purposes is 680. This is what gives borrowers a hard time in understanding the differences between the two figures.
Why the Mortgage Score is different
All these credit scoring models review your credit report–mainly focusing on your payment history and your credit utilization ratio. However, FICO Mortgage Score allocates some weight to these factors slightly differently than FICO or VantageScore, focusing on the probability of your mortgage credit risk.
Some key reasons why your mortgage credit score may be lower:Some key reasons why your mortgage credit score may be lower:
More Impact from Late Mortgage Payments: This has a more negative effect on FICO Mortgage Score if you have any late payments on an existing mortgage than on your regular FICO score. One 30-day late payment can impact the mortgage score much more than you can imagine.
More Influence from High Balances: The mortgage score also examines how much you owe relative to your total credit limit and available credit more closely. Hence, large balances on credit cards and other revolving credit accounts have a more negative impact. But even if accounts are paid in full every month, high balances are considered riskier.
New Credit Impacts Score More: The mortgage score also disfavors recent new credit more when you apply for a mortgage, especially if within the preceding one year. Other factors such as applying for several new credit cards also reduce your mortgage score when the lenders are evaluating it.
Short Credit History Viewed Less Favorably: Having a limited credit history (less than 3-years of experience) or a thin file can also affect a mortgage credit score more negatively than a thick file. You could have a good score otherwise, but little history is looked at as more dangerous.
These aspects make the score that a mortgage lender reviews may be slightly lower than your standard consumer credit scores.
How to Improve Your Mortgage Credit Score
Here are some key tips for making sure your mortgage credit score is at its optimal level before applying for home loan:Here are some key tips for making sure your mortgage credit score is at its optimal level before applying for home loan:
Avoid opening new credit accounts: Each hard inquiry and new account is reported as dangerous concerning the mortgage application soon. First, do not apply first for credit cards or any form of loans.
Pay down card balances: Keep credit card usage under 30% if possible and pay off installment loans if you can. Large balances have a negative impact on the mortgage scores.
Pay all bills on time: Credit history is still very much relevant. Clear all expenses such as credit card, utility bills, etc—on a monthly basis. If it will help, set up autopay. In this game, one mistake you make could lead to a significant decline in mortgage points.
Check score details: Mortgage-specific credit scores usually pull down the others; make an effort to upgrade these elements. Consumer reports that aren’t frequency derived do not reflect on mortgage level risks.
Give it time: Establish any newer credit accounts to over 12 months and let the negative impacts on your credit report die out before applying for home loan.
Talk to your lender: If you are not quite sure of your credit rating, try to establish whether your lender offers any program for your specific situation or if he has any recommendations on how you can increase your chances of getting the loan.
As some factors are weighted more than others in the mortgage credit scoring models, this score may be generally lower than your overall consumer credit score. Adhering to the above steps can steer it in the right direction as far as home financing is concerned. The challenge, therefore, lies in understanding what the mortgage scoring model is precisely trying to find out as compared to other general scores.
