Home Economics: Knowing the score on mortgage credit

Posted: September 29, 2012

Good credit is important, especially when you're looking to buy a house. Mortgage lenders have to know whether you're able to repay the debt, and have to determine through your credit history whether you're willing to pay, as well.

They use credit scores to determine, statistically, how much of a loan you can afford, whether to approve it, and the interest rate. The scores are obtained from the three major credit bureaus: Equifax, Experian, and TransUnion.

The most common credit score issued is the FICO, named for Fair Isaac Co., which developed the mathematical formula. Rankings are from 300 to 850: The higher the number, the lower the loan-default risk.

Among the factors that determine a credit score: how you've handled credit in the past; the amount of credit you're using relative to your maximum limit; length of credit history; how many credit accounts you have and what they are; public records that pertain to your credit (notices of bankruptcy), and how active you are in applying for new credit.

Based on their credit scores, 186,000 of 483,000 prospective home buyers were rejected for preapproved mortgages in 2011.

But it turns out that the score a credit bureau reports to an individual may not be the same one it provides to a lender.

In an analysis of 200,000 files from Equifax, Experian, and TransUnion released this week, the Consumer Financial Protection Bureau found that one-fifth of consumers "would likely receive a meaningfully different score than would a lender." By meaningfully different, the bureau meant that the consumer would be likely to qualify for different credit offers, either better or worse, than they would expect to get based on the score obtained.

"This study highlights the complexities consumers face in the credit-scoring market," said the bureau's director, Richard Cordray.

"When consumers buy a credit score, they should be aware that a lender may be using a very different score in making a credit decision," Cordray said.

The scores could be different for any number of reasons; it could be as simple as two people having the same name.

When discrepancies exist, consumers may take actions that, in the end, don't benefit them. For example, people who review their own scores may expect certain prices from lenders, may waste time and effort applying for loans for which they are not qualified, or may accept offers that are worse than they could get.

Say you're looking for a mortgage for a $200,000 house with 20 percent down. You think that your credit score is 750 and that this entitles you to today's low rates.

But the lender has a different score that shows you are a high risk and that your rate should be one percentage point higher.

In a country where financial literacy has proved to be a major problem, some borrowers might not take issue with such a discrepancy.

The study suggests doing otherwise.

There's no way for consumers to know how the credit scores they receive will compare with the scores potential lenders are using to make loan decisions. So consumers can't rely exclusively on the credit scores they receive to understand how lenders will view their creditworthiness.

What can you do when credit scores differ?

Shop around. Regardless of the scores that different lenders use, they may offer different loan terms because they operate different risk models or face different competitive pressures.

Don't rule out seeking lower-priced credit because of assumptions about your credit score. Though some consumers are reluctant to shop for credit out of fear that they will harm their credit scores, that negative impact may be overblown. Generally, inquiries don't result in a large reduction in credit score.

Dispute errors. Credit scores are calculated based on information in a credit file. Inaccurate information might mean the difference between being approved for a loan and being denied one.

Before shopping for a loan or a mortgage, the Consumer Financial Protection Bureau recommends reviewing your credit file for inaccuracies.

Each of the nationwide credit bureaus is required by law to provide credit reports for free to consumers who request them once every 12 months. Reach them at www.experian.com, www.transunion.com, and www.equifax.com.

If you credit score isn't as good as it should be, there are several steps you can take to improve it:

  • Pay your bills on time, at least the minimum amount by the due date.
  • Reduce your debt by paying down high credit-card balances. And don't charge up to the limits; the closer you get, the lower your credit score dips.
  • Don't apply for new credit cards. If you have a bank card that can be used at the home center and the department store, you don't need store cards, too.
  • Close unused accounts.

Starting Sunday, the Consumer Financial Protection Bureau will begin supervising credit-reporting agencies. Examiners will be looking to verify that the companies are complying with the law, including using accurate information, handling consumer disputes, making disclosures available, and preventing fraud and identity theft.


Contact Alan J. Heavens at 215-854-2472, aheavens@phillynews.com or @alheavens at Twitter. 

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