Most people know that the home price they can afford is dependent on their credit score. But most people don’t realize that multiple credit scores exist, and the one they pull may be quite different from the one the lender uses to calculate the loan amount.
Since your credit score determines the loans and the rates you’ll qualify for, knowing your score ahead of time is crucial — to avoid surprises, apply only for homes you’ll be able to afford, and work on improving your credit score, if necessary.
Unfortunately, determining the credit score that mortgage lenders will see isn’t quite as simple as pulling a free credit report online.
[Related: A First-Time Buyer’s Guide to the Process of Purchasing a Home]
How Mortgage Lenders Determine Credit Scores
Tri-Merge Credit Reports
When you check your credit score at home, you likely pull a single report that includes a score from one of the three main credit bureaus, Equifax, TransUnion, or Experian. The problem with this: the scores reported by each bureau can vary by over 100 points.
For example, you might feel satisfied with a score of 740 from one bureau, only to learn later that your two other scores are below 650.
Those 100 points can make a big difference: Mortgage rates typically follow a risk-based formula for pricing their rates, meaning that consumers with lower credit scores typically default to higher rates than those with higher scores would receive.
To get an accurate picture of your credit, mortgage lenders typically pull a tri-merge credit report, which includes a score from each of the three bureaus. They then disregard the high and low scores, using only the middle credit score.
So, if a lender pulls a 745, a 760, and an 800, they will disregard the 745 and 800, and will use the middle score of 760.
[Related: 5 Priceless Reasons for First-Time Home Buyers to Purchase Instead of Renting]
Fico Score Versions
Determining the score that mortgage lenders will use may seem pretty simple, then: Just pull all three of your scores and find the middle one.
However, even this leaves quite a bit of room for error.
49 different versions of FICO scores are currently available to consumers and creditors, and each version uses a slightly different formula or algorithm to arrive at a particular score. Mortgage lenders, credit card companies, and car dealers each use a different version of the score.
The obvious question is: which version will your mortgage lender pull?
While knowing for certain is impossible, most mortgage lenders pull FICO version 8. Referencing version 8 scores yourself will give you the best idea of what your mortgage lender will pull.
To pull version 8 of your FICO scores, visit myFICO.
How to Begin the Process
To recap, pull version 8 FICO scores from each of the main credit bureaus and find your middle score to determine the exact number your mortgage lender will be referencing.
If the number you find isn’t as high as you’d like it to be, we’d be happy to discuss the best ways to improve your credit score with you. Seattle Mortgage Planners is here to help with all of your first-time home buying needs.
Interested in learning more? Contact us today!
Featured image via Pixabay
