Reasons Your Credit Score Is Lower Than You Thought 

Have you ever applied for a home loan thinking your credit score was more than enough, only to be told it isn’t? This is one of the many mysteries most potential homeowners can seem to unravel. The answer is, however, simpler than you think. Most mortgage lenders use a much lower score than what you see on your credit report. It is also worth noting that you may hold more than one credit score. Finding out what your score is (with the relevant body) before applying for a home loan can save you the frustration and possible high-interest rates that accompany lower credit scores. This article outlines some of the reasons your credit score is lower than you thought. 

What is the Ideal Credit Score for a Mortgage? 

The required minimum credit score may vary depending on the type of loan you apply for. Here is a brief outline to help you understand better. 

Type of loanMinimum Credit ScoreMinimum down payment
Conventional Loan6203%
FHA Loan5903.5%
USDA Loan6400%
VA Loan580 – 6200%
Jumbo Loan700 – 74010 – 20%

It is also worth noting that:

  1. You may qualify for an FHA loan even with a credit score of between 500 – 579, you’ll only need to make a down payment of at least 10% of the total amount. 
  2. Lenders are allowed to set minimum credit score requirements for VA and USDA loans. 
  3. First-time homebuyers may qualify for a mortgage loan even with a low credit score (less than 600).
  4. Your lender may see a different credit score from what you see in your credit card statement or credit monitoring app. In most instances, lenders will see a lower credit score than you have on paper. This mainly depends on the criteria they use to determine a person’s credit score – based on their credit history and other factors. 

Reasons Your Mortgage Credit Score is Lower? 

First, there may be a disconnect between the free credit score provider and what your mortgage lender uses. In most instances, credit card companies, banks, and other financial providers provide a credit score whenever you use their services. A credit monitoring company can also provide free credit reports anytime. While informative, third-party providers’ scores may be estimates, thus only meant to be educational. Their only purpose is to inform you of your credit performance as well as help you monitor your creditworthiness. For this reason, credit scores from third parties may not be accurate. It’s thus safe to say credit card companies and other third parties only offer a generic credit score. 

Secondly, lenders use different credit scoring algorithms.

Lenders and creditors use industry-specific scoring methods to calculate one’s credit score. Auto lenders, for example, use a scoring method that better predicts the chances of you defaulting on an auto loan. Mortgage lenders, however, use a different mechanism and use FICO scores from the three principal credit bureaus (TransUnion, Equifax, and Experian) to calculate an applicant’s median credit score. 

Unknown to many, mortgage lenders have a tougher credit scoring model because mortgage loans can run for several decades, a reason they need to be absolutely sure you can pay large debts on time. With mortgage companies lending out large sums of money (between $100,000 and $1 million), it is understandable for them to have stricter credit requirements. The rigorous scoring model almost always guarantees a lower credit score than what you know or get from credit card companies. 

Where Can i Check My FICO Score?

Most free credit service providers don’t use/have the FICO scoring model. Sadly, this is what your mortgage lender uses when processing loan applications. However, requesting your credit report from one of the providers listed below can help you get a more accurate credit report.

credit score

These are: 

  1. AnnualCreditReport.Com is the only official channel anyone can use for a free credit report. Typically, you’ll only be able to access their services once per year – use it wisely.

The sources mentioned above should provide you with accurate scores and what your mortgage lender will use. Whether paid or free, the final report will be worth the effort. If your credit score is lower than the minimum required (for one reason or another), you still have a chance to build it up. Some of the best and simple ways to build your credit score are by keeping a low credit utilization and making payments on time. You might also want to quit shopping for new credit. It will be just a matter of time before your credit numbers improve. 

How Your Credit Score Can Affect Your Eligibility for Mortgage Loans

Lenders use your credit score to determine: 

  • How much you qualify for, and home price range
  • Interest rate
  • Other loans that you qualify
  • Monthly payments through the life of the loan.

In other words, an excellent credit score can see you enjoy lower interest rates on your mortgage, sometimes translating to $200 in savings per month on a $200,000 mortgage loan. A poor credit score, on the other hand, will have an opposite impact on your eligibility, how much you can access, and a significantly higher interest rate if you do. This is one of the reasons why we recommend checking your credit score first before applying for a mortgage. 

Credit scores may also differ depending on the agency and credit scoring model used. To be on the safe side, find out what credit agency your mortgage lender uses and what their scoring model is, then request a credit report from the same. Most lenders will also provide a portal where customers can check their eligibility. 

How Credit Reporting Bureaus (CRBs) Affect Your Credit Score

As mentioned before, Experian, Transunion, and Equifax are the 3 leading credit reporting agencies in the country. Although you could have an almost similar score with two of these, chances are it will be different with the third agency. This is because creditors can decide what information they share with bureaus and which bureau to report to. It is thus more likely than not to find different credit scores under your name. 

It is also worth noting that most of these agencies use the same factors to calculate one’s credit scores. As long as you pay your loans and credit card responsibly, then chances are your credit scores will be almost similar.

Reporting to different credit reporting bureaus is one thing; the scoring model used is another. These models also have different versions, with which an agency may choose to use one instead of another. 

How Do the Different Scoring Models Affect One’s Score?

Back in the day, banks and other financial providers used different and unique scorecards to assess a person’s risk of defaulting on a loan. Since most of these institutions didn’t share data, the scores would vary significantly from one lender to the other. It was thus upon the loaning officer in charge to calculate the applicant’s risk factor and determine their ability to repay. 

The different ‘scorecards’ used back then weren’t adequate, leading to the introduction of the first general-purpose credit score by Fair, Isaac, and Company (later Fair Isaac Corporation) in 1989. This would later be known as the FICO Score. This scorecard would sift through information and credit reports to generate an individual’s score, which banks could use when processing loans. 

The Fair Isaac Corporation has since expanded to offer 28 unique scores optimized for different types of mortgage, credit card, and auto lending results. FICO isn’t the only player today – companies such as VantageScore have also introduced a credit scoring model as well. 

According to the vice president of VantageScore solutions, Jeff Richardson, the VantageScore model aims to expand the number of consumers who can access and receive credit scores. These include recent immigrants, college students, and anyone else that haven’t used credit. 

VantageScore vs. FICO

Before 2006, financial service providers only had one scoring system – FICO. It was the go-to credit scoring system whenever any bank or financial lender wanted to make a significant financial decision, especially around credit applications. That was until VantageScore was launched in 2006. Most financial institutions and credit companies used VantageScore to provide consumers with a non-educational credit score on a large scale. This is because VantageScore was designed to allow consumers to access their credit scores quickly and efficiently. 

The FICO scoring model has however held the top spot with mortgage lending. Much of the data you’ll find on free websites and some credit card companies are mainly from   VantageScore uses bits of financial information, including telecom billing information, utility bills, rent, older credit files, and public records, to build a consumer’s profile. In addition to this, VantageScore looks into the first month one’s credit activity was reported when generating credit reports, making it faster and more organized. 

FICO, however, requires one to have an account for at least 6 months to generate a score. For that reason, most credit companies use VantageScore to create an individual’s credit score. VantageScore is thus widely used by: 

  • Auto lenders
  • Credit card issues
  • Credit unions
  • Personal loan companies
  • Banks
  • Consumer websites
  • Telecommunications, tenant screening, and utility companies
  • Government entities. 

How Credit Scores are Generated and Why It Matters

Knowing your credit score is one thing; understanding what the numbers mean is another. Knowing the difference between a credit score and a credit report helps one understand their financials better. 

A credit report provides a log of your borrowing history. It is a record of every line of credit and loan opened in your name, their dates, payment history (missed and late payments), etc. The credit report shows a loaning office how reliable you can manage and pay back loans. 

Your credit score is a single number showing how responsible you are based on everything on your credit report. The 3 credit bureaus thrive in the world of credit reporting. These companies keep a separate record showing your borrowing history (provided for by creditors). While credit bureaus keep your borrowing records, FICO and VantageScore keep a score card. They calculate your score based on the credit reports provided. In simpler terms, failing to pay debts on time will hurt your credit score, while a low credit utilization ratio will boost your overall credit score. 

Why Are Credit Scores Vital? 

Your credit score is essential in that: 

  • It determines what loans you can access
  • t determines your mortgage interest rates
  • It shows how expensive a car or house you can afford
  • Insurance companies need credit scores to calculate premiums for home and auto insurance cover (a bad credit score translates to higher premiums)
  • It helps determine your credit card interest rates
  • Helps landlords decide who can rent their houses/apartments
  • Enables telecom companies to determine if you should make a deposit or not

In other words, your credit score will determine whether you can get financing, how much you qualify, and the interest to pay. For this reason, it would be best to keep your credit score as high as possible. 

Credit Score Requirements aren’t Rigid

There’s nothing better than knowing you meet your lender’s minimum credit requirements. This doesn’t however mean you can’t access a mortgage if your credit score is low. On the flip side, you also can be sure you’ll qualify for a mortgage even with a good FICO score. Your credit score is just but one of the many factors lenders consider in mortgage applications. Most lenders would be flexible with these requirements, allowing consumers to access loans even if they didn’t qualify for one on paper. 

Take an example of someone with a credit score of about 620. Although they meet the minimum score for a conventional mortgage, he/she might not qualify if they have exceeded the lender’s debt-to-income (DTI) ratio. Inability to provide proof of steady income within 2 years can be a disqualifying factor too. 

Why Do FHA Loans Accept Lower Credit Scores? 

Most loan officers and online pre approval processes may direct you to FHA loans, especially if your credit score is too low. This is because the Government insures FHA loans under the Federal Housing Administration. This makes it the best option for individuals that don’t qualify for a conventional mortgage. 

With FHA insurance, borrowers with bad credit can access mortgage loans with a low-down payment and considerably lower mortgage interest rates as well. You’d however need to pay an upfront MIP (mortgage insurance premium) of 1.75% of the total amount. You’d thus need to pay as little as $4,375 for a $250,000 home loan. In addition, you’ll be required to pay 0.85% of the loan balance each year for mortgage insurance premiums. One of the main advantages of going this route is that you can refinance to a conventional loan once done paying the down payment (or as agreed with the lender). Refinancing to conventional mortgages helps eliminate the extra premiums that come with FHA loans. 

Private mortgage insurance (PMI) may be required for ‘conforming’ or conventional mortgages set under the Fannie Mae and Freddie Mac rules. However, this requirement can be overlooked if you make a down payment of at least 20% of the total amount. It is also worth noting that PMI payments will be waived as soon as you reach 20% of the loan amount. 

Do I Qualify for A Mortgage?

Unknown to many, credit guidelines for mortgages are quite flexible. It isn’t uncommon for individuals with a credit score of 580 to qualify for conventional mortgage loans. It becomes even easier if all the other qualifications are met.   If you have been looking to own your first home or wish to buy a second one, you can still check your creditworthiness and eligibility with your preferred mortgage provider. You can either do this online or book an appointment with the lender. Talking to your lender first, especially if you wish a few things clarified, would be a wise move.