“Get your free credit score. No credit card required!”
“Your credit scores should be free. And now they are.”
Sounds great; but, these free credit scores can cause quite a bit of confusion when you’re buying a home — when you realy need to know your credit score.
We began analyzing credit reports in 2004. We've worked with thousands of mortgage lenders and realtors. One story we hear far too often is: “The borrower got a free credit score and was very upset when it wasn’t the same as their mortgage score.”
Why is my free credit score higher than my credit score from a mortgage lender?
In a nutshell: You have lots of credit scores, and the ones you get for free are not the ones that mortgage lenders use. The different scores are based on different formulas, called score models. It can get complicated (see “What is a credit score?") Let’s start with what’s important:
Why does it matter?
Because a free credit score can easily be 15 to 50 points – or more – higher than your mortgage score. The difference between a 615 and 620 score can be the difference betweengettinga home loan and beingturned down. The difference between a 635 and 640, or 659 and 680, can be thousands of dollars in interest payments. Even small differences can have big consequences when you’re trying to buy a home. Three things can happen to you:
- very low score, no loan;
- low score, loan with high interest;
- high score, loan with low interest.
Credit scores are not made for your use; they are designed to help lenders make a decision about you. But you need to know which one is used when you buy a home.
What credit score is used for home loans?
There are five different FICO score models currently used by most lenders of all types. The vast majority of mortgage lenders use the same ones: FICO Score 2, 4 and 5. These are the models used by the credit bureaus Experian, TransUnion and Equifax respectively. They're called FICO mortgage scores.
FICO Score 2, FICO Score 4 and FICO Score 5: remember these names when comparing the credit scores you get for free.
Why do mortgage lenders use these FICO score models?
This history is worth another article; the short answer is: Because these are the models required by Fannie Mae and Freddy Mac:"The lender must request these FICO credit scores..”
You have three FICO mortgage scores, one for each bureau.
A mortgage loan officer looks at all three of your FICO mortgage scores (2, 4, 5). Each mortgage score is based on your credit history at one credit bureau. So you have anExperian Mortgage FICO Score, a TransUnion Mortgage FICO Score and an Equifax Mortgage FICO Score.
The three different models were designed with a goal of producing the same result from all bureaus, but… you guessed it: they often don’t. The high and low score can be as much as a 100 points apart.
Which one counts?
Your mortgage midscore: the score that counts when you’re buying a home.
Your credit score for getting a home loan is the middle score of the three and is called your mortgagemidscore. Mortgage lenders use the middle score of all three bureaus' FICO mortgage score todetermine yourrisk for a home loan.
For example, imagine your mortgage scoreswereExperian: 598, TransUnion: 619 and Equifax: 676. Your midscore would be 619. This is one point too low for many mortgage loan programs. Your mortgage score would not be yourEquifaxscore, 676, which would easily qualify for a loan. So, not only does the score model matter, not only does your history at eachmatter; it also matters how your score from one bureau compares with your score from the other bureaus. This is why:
Knowing your FICO mortgage score from just one bureau can be misleading.
Further, a FICO score model other than FICO 2, 4 or 5 can be even more misleading. And a non-FICO score from a single bureau is of very little use to you in knowing where you stand when buying a home.
Single bureau score, not mortgage score model, not FICO score… This is the world of the free credit score.
How do I find out my FICO mortgage score?
While none of the companies advertising free credit scores give you your FICO mortgage midscore, there are two ways to get it. [See: "How can I get my credit score for buying a home?”]In the end someone pays for it; either you or the lender.
Which credit score model is used for free credit scores?
You know by now it’s not going to be FICO Score 2, 4 and 5 – for your FICO mortgage midscore. Let’s look at the free scores you get from some of the most popular websites. These fall into two categories. In reverse order of usefulness:
1) VantageScore: The Free Credit Score from CreditKarma, CreditSesame, NerdWallet…
These are non-FICO scores, most often based on your credit history at a single bureau.
The free credit score from CreditSesame isTransUnion’s VantageScore. Credit.com’s free credit score is aVantageScore based on your credit history at Experian. Your free credit score from Credit Karma is from Equifax or TransUnion using the VantageScore score model.NerdWallet's free credit score is a TransUnion VantageScoreas isCapital One’s freeCreditWise and TransUnion’s free credit score direct from their website.
How does your VantageScore free credit score compare to your FICO credit score for a mortgage loan?
VantageScore is from a single bureau, not a FICO score, and not a FICO mortgage score model. Three strikes.
It's a different formula than FICO with a different score range – off to a bad start. There has been one in-depth analysis of VantageScore vs. FICO: a 2012 statistical study by the Consumer Financial Protection Bureau. Their result?
The mean VantageScore was 36 points higher than the FICO credit score for the same credit file.
Our recent experience with our clients using the current model has also been that the VantageScore is most often higher than the FICO mortgage score. More importantly, certain account activity can cause a significant increase in the VantageScore with no increase in the FICO mortgage score. The difference can be quite large – and very disappointing to homebuyers.
It’s a bad idea to take your VantageScore free credit score from CreditKarma, CreditSesame, Credit.com or NerdWallet to your realtor or mortgage lender and expect it to match your FICO mortgage midscore.
2) FICO Model 8 Free Credit Score: Banks and Credit Card Companies
More and more banks are offering a free FICO score, but the score you get for free from a bank or credit card company is almost certainly going to be a FICO 8 model from a single bureau:
The free credit score from Discover is FICO Score 8 based on your credit history at TransUnion.The free credit score from Citigroup (Citi Bank) is an Equifax FICO Score 8. The free credit score from Barclays is an Experian FICO 8.
Bank of America and American Express are also single bureau FICO 8 scores.
The free credit score offered by the credit bureau Experian, part of their CreditWorksproduct, is an Experian FICO® Score 8 model. (FreeCreditScore.com is owned by Experian, and offers the same free score.)
How does your free FICO Score 8 Free Credit Score compare to your FICO credit score for a mortgage loan?
FICO 8 free credit scores are from a single bureau, is a FICO score, but not a FICO mortgage score model. Two strikes.
Can you easily convert? No. The formulas are complicated and every credit file is different. It’s impossible to say: "Add or subtract X from your FICO 8 Score to determine your FICO Mortgage Score." In general, the FICO 8 Score model is more forgiving of single negative events, like a late payment.
However, a single late payments can greatly reduce your FICO mortgage score. So, if this applies to you, your mortgage score will be considerably lower than your FICO 8 score.
In our experience, your FICO mortgage midscore is usually lower than your FICO 8 score.
Free Annual Credit Report
There is something very relevant to your credit for buying a home that you can get for free. Federal law requires Equifax, Experian and TransUnion to give you a free credit report every 12 months if you ask for it. The easiest way to get these is at Annual Credit Report.You’ll get your credit file from each bureau, so you can check each bureau’s file for accuracy. You’ll also see which bureaus are – and are not – using which credit accounts to calculate your credit scores.
There is no credit score provided; but, at least with this free service you won’t be misled when it comes to your credit score for buying a home.
If your goal is to buy a home and you don't know where to start, contact us for a Credit Security Analysis. We'll provide education, analyze your credit as it relates to your life goals, and develop a realistic, personalized plan to get you on the right track to a home loan – whatever your situation. Knowing the truth, having a plan, and doing the next right thing can be a great comfort for you and your family.
