The Inside Scoop

Credit scores are the essence of the kind of mortgage a consumer gets. Consumers are becoming more savvy about the importance of their credit scores, which play a role in mortgage production that even many brokers may not understand.

When determining whether or not to approve each loan request, financial institutions follow loan approval guidelines. They generally consider an applicant’s assets, income, monthly payments, and credit history. While all the guidelines are important, credit history is given the most weight.

In years past, many lenders used specific credit guidelines. For instance, some lenders would not approve a loan application if the consumer had been more than 30 days past due in the prior two years on any account. Others may have denied any applicants that had ever filed for bankruptcy protection.

During recent years, however, those specific guidelines have been replaced with credit score guidelines. For instance, while a loan applicant might have previously been denied approval due to a recent 60 day late payment, that same applicant might be approved today as long as the credit score was at least 700.

Brokers obtain an applicant’s credit history from one or more of three credit reporting repositories: Experian, Trans Union, and Equifax. Lending institutions constantly provide borrowers’ account and payment information to each repository. For example, if a borrower purchases a new automobile with a loan from a bank, the bank will report the loan details to one or more of the repositories, and continue to report whether the payments are made on time.

Credit reports from each repository are similar, but lenders may not provide information to all repositories. If a consumer’s current score from the three credit reporting agencies are different, it’s probably because the information those agencies have on the consumer differs, according to Fair, Isaac & Company, Inc. This is because lenders in one region of the country may be more likely to provide account information to one repository than to another.

Credit scoring was introduced by Fair Isaac and it developed three different credit scoring models specifically for each repository: the FICO score for Experian, the Empirica score for Trans Union, and the Beacon score for Equifax. The term “credit score” also is commonly referred to as “FICO score,” according to Fair Isaac.

Those models base more than one-third of a consumer’s score on payment history — the longer ago the late payment was made, the better. Another one-third is based on how much is owed, taking into account limits on credit cards versus the unpaid balances, the type of accounts (credit card, car loan, etc.), and how many accounts have balances. Other factors used by the repositories include the number of accounts recently opened and how long the consumer has had established credit.

As technology becomes more sophisticated, consumers are becoming more educated about their credit scores and how it affects the kind of mortgage they receive. Knowyourloanrate.com, launched by TrueLink last month, is an example of the tools available to consumers shopping for a mortgage.

“When it comes to the biggest purchase of our lives, we’re going in blind,” said Russell Schaub, CEO of TrueLink. “We are trusting mortgage brokers who may not necessarily have our best interests at heart, or we are relying on rudimentary mortgage rate calculators. Now consumers can level the playing field.”

After performing what TrueLink calls an “objective review” using the same criteria as lenders, the site helps shoppers understand their credit standing and for what rate they qualify. Consumers are then armed with this new knowledge when they arrive at the lender’s.

And brokers should be as savvy.