Credit Scores for Kentucky Mortgages

Which Lenders Use Which FICO Scores?

With the exception of the mortgage market, which is heavily regulated, lenders can generally choose which FICO score they use when doing a credit check. However, they tend to use certain versions depending on the kind of credit for which you’re applying. Here’s a look at the most common FICO scores used for each type of credit.

Mortgages

When you’re taking out a mortgage, there’s a good chance that the loan will end up being bought by Fannie Mae or Freddie Mac. As with many other aspects of the housing market, these massive government-backed mortgage companies dictate which FICO scores can be used by home lenders. Here are the FICO scores used in credit reports generated by the three credit bureaus (as well as the alternative names the bureaus use to advertise them):9

• Experian: FICO Score 2 (Experian/Fair Isaac Risk Model V2SM)
• Equifax: FICO Score 5 (Equifax Beacon 5.0)
• TransUnion: FICO Score 4 (TransUnion FICO Risk Score, Classic 04)

Why Do Mortgage Lenders Use Older FICO Scores?

The reason mortgage lenders use older FICO Scores is because they don’t have a choice. They are essentially forced to use them.

Unlike every other industry, mortgage lenders don’t have the flexibility to choose the scoring model brand or generation they want to use. Mortgage lenders must follow the direction of the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, as it pertains to scoring models.

The GSEs play an important role in mortgage lending. These publicly traded companies buy mortgages from banks, bundle them together, and sell them to investors. This frees up funds so that banks can offer new mortgages to additional homebuyers.

For a bank to sell a mortgage to Fannie Mae or Freddie Mac, the loan has to meet certain guidelines. Some of these guidelines require borrowers to have a minimum credit score under specific FICO Score generations.

If a lender uses a different scoring model other than what the GSEs approve when it underwrites a mortgage, it probably won’t be able to sell that mortgage after it issues the loan. This limits the lender’s ability to write new loans because it will have less money available to lend to future borrowers.

On Tue, Aug 2, 2022 at 2:41 PM Joel Lobb, Mortgage Loan Officer <kentuckyloan@gmail.com> wrote:

Heather,

If you’re planning to apply for a mortgage, be aware that the credit score you see on your application might differ slightly from the one you’re used to.

It might even be different than what comes up when you monitor your credit, or even when you apply for a car loan.

Banks use a slightly different credit score model when evaluating mortgage applicants. Below, we go over what you need to know about credit scores you’re looking to buy a home.

The scoring model used in mortgage applications

While the FICO® 8 model is the most widely used scoring model for general lending decisions, banks use the following FICO scores when you apply for a mortgage:

FICO® Score 2 (Experian)
FICO® Score 5 (Equifax)
FICO® Score 4 (TransUnion)

As you can see, each of the three main credit bureaus (Equifax, Experian and TransUnion) use a slightly different version of the industry-specific FICO Score. That’s because FICO tweaks and tailors its scoring model to best predict the creditworthiness for different industries and bureaus. You’re still evaluated on the same core factors (payment history, credit use, credit mix and age of your accounts), but the categories are weighed a little bit differently.

The FICO 8 model is known for being more critical of high balances on revolving credit lines. Since revolving credit is less of a factor when it comes to mortgages, the FICO 2, 4 and 5 models, which put less emphasis on credit utilization, have proven to be reliable when evaluating good candidates for a mortgage.

Mortgage lenders pull all three reports,from all three bureaus, but they only use one when making their final decision.

“A bank will use all three bureaus,”— “It’s called a tri-merge.”

If all three of your scores are the same, then their choice is simple. But what if your scores are different?

If two of the three scores are the same, lenders use that one, regardless of whether it’s higher or lower than the other one.

And if you are applying for a mortgage with another person, such as your spouse or partner, each applicant’s FICO 2, 4 and 5 scores are pulled. The bank identifies the median score for both parties, then uses the lowest of the final two.

—

Mortgage Loan Officer

Individual NMLS ID #57916

 

American Mortgage Solutions, Inc.

10602 Timberwood Circle 

Louisville, KY 40223

Company NMLS ID #1364

 

click here for directions to our office

 

Text/call:      502-905-3708

fax:            502-327-9119
email:          kentuckyloan@gmail.com

https://www.mylouisvillekentuckymortgage.com/

 

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The Basics of Credit Scores for Kentucky Home Buyers and Home Owners

We are going to be centering on the basics of an increasingly important portion of a buyer’s mortgage application – the credit score.

First, the 3 major national credit bureaus are: Experian (XP), Transunion (TU), and Equifax (EF)….But better terms to describe their function are:

Repository – they are huge “holders” of data; information about you and millions of other people.
Credit Reporting Agency (CRA) – these “repositories” get their data when creditors and courthouses “report” to them; and when you pull someone’s credit report, they in turn “report” that data to the entity that requested the information.

Credit Scores (in general)

What is a Credit Score?  It’s a number that, at a glance, helps lenders determine how likely you are to make your proposed payments on time.
How is it generated?  A score is only created when you pull someone’s credit file, and all the data retrieved is fed through a complex mathematical formula.  As a person’s data at the repositories changes, their score would change also….positively or negatively.
Why are scores different?  Fair Isaac Corporation (FICO) created the mathematical formulas that generate the score, BUT….
There are different score formulas depending on what you are applying for….a mortgage, credit card, auto loan, insurance, or even if you are not applying for anything at all and get a “consumer” score directly from one of many websites that advertise “scores” these days.
Fair Isaac sold their original formulas to XP, TU, and EF, which in turn, slightly altered them based on their own studies and analysis.
The 3 bureaus typically don’t have the exact same data on a consumer.  So, if the data is different or has changed, the scores will also be different.

The FICO score on your mortgage credit report – The score range is 300-850.

What makes up the score? 1.    35% of the score is based on Payment History
a.    Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
b.    Presence of adverse public records (bankruptcy, foreclosure, judgments, suits, liens, wage attachments, etc.) collection items, and/or delinquency (past due items).
c.    Severity of delinquency (how long past due).
d.    Amount past due on delinquent accounts or collection items.
e.    Time since (recentness of) past due items (delinquency), adverse public records (if any).
f.     Number of past due items on file.
g.    Number of accounts paid as agreed

2.    30% of the score is based on the Amounts Owed
a.    Amount owing on accounts.
b.    Amount owing on specific types of accounts.
c.    Lack of a specific type of balance, in some cases.
d.    Number of accounts with balances.
e.    Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts), often referred to a Percentage of Usage.
f.    Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans).

3.    15% of the score is based on the Length of Credit History
a.    Time since accounts opened.
b.    Time since accounts opened, by specific type of account.
c.    Time since account activity.

4.    10% of the score is based New Credit and Inquiries
a.    Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account.
b.    Number of recent credit inquiries.
c.    Time since recent account opening(s), by type of account.
d.    Time since credit inquiry(s).
e.    Re-establishment of positive credit history following past payment problems.

5.    10% of the score is based on the Types of Credit Used
a.    Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.).

The Basics of Credit Scoring for Kentucky Home Buyers and Home Owners

Special Note About Inquiries
This is always a hot topic because borrowers think they will hurt their score because their credit report is pulled.  But as explained above, New Credit only accounts for 10% of a person’s score, and of that, inquiries is only a part.  Also, keep in mind what an inquiry represents – application for additional credit.  If your credit report and score shows that you are a responsible borrower, then applying for more credit will have a minimal affect on your score.  But if you appear to be an irresponsible borrower, then the inquiry may drop your score a few points, or several points.

“For many people, one additional credit inquiry (voluntary and initiated by an application for credit) may not affect their FICO score at all.  For most people, a credit inquiry will only decrease their FICO score by a few points.”
“Looking for a mortgage or an auto loan may cause multiple lenders to request your credit report, even though you’re only looking for one loan.  To compensate for this, the score ignores all mortgage and auto inquiries made in the 30 days prior to scoring.  So if you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping.”

How to improve your credit score!

Pay Every Single Bill on Time, or Early, Every Month

Please understand one thing; paying your bills on time each month is the single most important thing you can do to increase your credit scores.

Depending on the credit bureau, there are 4 or 5 main items that determine everyone’s credit score. Of those items, your history of paying bills makes up about 35% of the score. THIS IS HUGE!

Paying your bills on time shows lenders that you are responsible. It will also spare you from paying late fees whether it is a charge from a credit card or an added fee from your landlord.

Use a calendar, or a phone app, or some other organized system to make sure that you pay your bills on time every single month.

MAIN TIP: Do not pay ANY bill late!

Credit Cards: Lower Balances Are Always Better 

Another big factor in calculating a credit score is the amount of credit card debt. Credit bureaus look at two things when analyzing your credit cards.

First, they look at your available credit limit. Second, they look at the existing balance on each card. From these two figures an available ratio is developed. As the ratio goes higher, so too will your credit score increase.

Here is one simple example. Suppose a person has the following credit cards, corresponding balances, and credit limits

Credit Card	Current Balance	Credit Limit
Chase Visa	$105	$1,000
MarterCard from local bank	$236	$1,500
BP MasterCard	$87	$500
Totals	$428	$3,000

From these numbers, we get the following calculation

$428/$3,000 = 14%

In other words, the person is using 14% of their available credit and they have 86% available credit. The closer that ratio is to 100%, the better the credit score will be.

MAIN TIP: Keep all credit card balances as low as possible.In this particular example, if they had a problem with their car, or needed medical attention or some other emergency, the person would have the money necessary to handle the situation without incurring new debt. This is wise on the consumer’s part and lenders like to see this kind of money management.

Credit Cards Part 2: 1 or 2 is Better Than a Wallet Full

The previous example showed a person that utilized just three credit cards. This is much better than someone who has 5+ credit cards, all with available balances. Why? Lenders do not like to see someone that has the potential to get too far in debt in a short amount of time.

Some people have 5, 10 or more credit cards and they use many of them. This shows a lack of restraint and control. It is much better, and neater, to have only 2 or 3 cards with low rates that handle all of your transactions. A lower number of cards are easier to manage and it does not give a person the temptation to go on a huge shopping spree that could take years to payoff.

MAIN TIP: Try to limit yourself to no more than 2-3 credit cards.

Keep the Good Stuff Right Where it is

Too many people make the mistake of paying off old debts, such as old credit cards, and then closing the account. This is actually a bad idea.

A small part of the credit score is based on the length of time a person has had credit. If you have a couple of credit cards with a long track history of making payments on time and keeping the balance at a manageable level, it is a bad idea to close out the card.

Similarly, if you have been paying on a car or motorcycle for a long time, do not be in a hurry to pay off the balance. Continue to make the payments like clockwork each month.

An account that has a good record will help your scores. An account that has a good record and multiple years of use will have an even better impact on your score.

MAIN TIP: Keep old accounts open if you have a good payment history with them.

Stop Filling Out Credit Applications

Multiple credit inquiries in a short amount of time can really hurt your credit scores. Lenders view the various inquiries as someone that is desperate and possibly on the verge of making a bad financial choice.Too many people make the mistake of getting more credit after they are approved for a loan. For example, if someone is approved for a new credit card, they feel good about their finances and decide to apply for credit with a local furniture store. If they get approved for the new furniture, they may decide to upgrade their car. This requires yet another loan. They are surprised to learn that their credit score has dropped and the interest rate on the new car loan will be much higher. What happened?

If you currently have 2 or 3 credit cards along with either a car loan or a student loan, don’t apply for any more debt. Make sure the payments on your current debt are all up to date and focus on paying them all down.

In a few months of making timely payments your scores should noticeably go up.

MAIN TIP: Limit your new loans as much as possible

 

Basics of Credit Scoring for Kentucky Home Buyers and Home Owners
For your free credit report and analysis call us today at 502-905-3708 or email us at kentuckyloan@gmail.com

—

Joel Lobb
Mortgage Loan Officer

Individual NMLS ID #57916

 

American Mortgage Solutions, Inc.

10602 Timberwood Circle 

Louisville, KY 40223

Company NMLS ID #1364

 

click here for directions to our office

 

Text/call:      502-905-3708

fax:            502-327-9119
email:          kentuckyloan@gmail.com

https://www.mylouisvillekentuckymortgage.com/