Use Only a FICO Credit Score When Preparing For the Florida Home Loan Process

If you think you know your credit score, and the source is different than FICO, you might want to think again, writes Kenneth Harney, the executive director of the National Real Estate Development Center and a nationally syndicated columnist.

Both mortgage brokers and lenders say the following scenario happens all the time. A mortgage applicant will say that they’ve already checked his or her credit score online, but then the loan officer retrieves the potential buyer’s FICO score and finds it to be 50-100 points lower than the generic credit score the applicant quoted.

“This is becoming a real problem. A lot of people simply don’t know the difference between FICO scores and other scores. They think it’s all the same,” said Ginny Ferguson, past chairperson of the National Association of Mortgage Brokers‘ credit-scoring committee, and co-owner of Heritage Valley Mortgage in Pleasanton, Calif.

After all, your FICO credit score, developed by and named after Fair Isaac Corp., is the predominant credit measure used by the home loan industry at the onset of the mortgage process. Scores run from 300-850 and are used to predict a borrower’s likelihood of future non-payment. Higher scores on this credit report indicate better credit worthiness.

THE RELEVANCE

Other commercial scoring models, which may also accurately predict risk of delinquencies, non-payments and gauge a consumer’s credit health and behavior, are widely available on the Internet. Yet they are rarely used by Florida home loan providers, and therefore have limited relevance for a mortgage application.

Lenders use FICO scores to price mortgages, with lower FICO scores costing applicants hundreds of dollars a month in payments (as a result of higher interest) and thousands of dollars over the term of the loan. When a buyer’s FICO score is substantially lower than a non-FICO score, the consumer often assumes the broker has done something to make their score worse — in an effort to charge higher home loan rates or fees — which is not the case.

Independent credit reporting agencies that supply FICO scores to mortgage lenders also are feeling the heat.

“Our members get blamed by their own customers, who are primarily brokers and lenders,” said Terry Clemans, executive director of the National Credit Reporting Association, representing hundreds of credit agencies in charge of providing consumer reports and scores to mortgage lenders.

“We get a lot of angry conversations about ‘why is your score lower’ than what the consumer got somewhere else online,” Clemans said.

What a buyer must remember is that credit reporting agencies are simply middlemen — purchasing reports and FICO scores from the three national credit bureaus, Equifax, Experian and TransUnion — and repackaging them for home loan providers.

Ferguson lectures nationwide to loan officers on credit scoring. She says she has seen only one instance where a mortgage applicant’s FICO score was higher than an Internet pop-up site’s score, and in that instance it was just by two points. Typically a FICO score comes in 35-100 points beneath a generic score purchased from an Internet site.

That’s where the problem lies, because Florida home loans from most local firms (along with most of the nation’s lenders) won’t use anything but FICO.

Fair Isaac itself is concerned over the marketplace confusion its scores are causing. Tom Quinn, V.P. of Global Scoring for Fair Isaac, says that the company’s own research documents disparities of anywhere from five to more than 200 points between FICO and non-FICO tabulations of the same consumer’s credit. Disparities exist because of statistical models that often assign different weighting to the same information.

Some of the most prevalent Internet-driven score purveyors are associated with national credit bureaus, but they don’t make an effort to tell the consumers that the credit score they are buying is an in-house, generic score, not a FICO. Therefore, it carries very little relevance in a home mortgage transaction.

READ THE FINE PRINT

To use one example, TrueCredit.com trumpets the importance of credit scores as financial management tools, but reveals only (in tiny block print) at the end of its “credit score sample report” page that “the credit score provided here is not a so-called FICO score.”

Steven Katz, a spokesman for TransUnion (which that owns TrueCredit.com), said his company’s score is really intended to help consumers understand the importance of taking control of their own credit management when they are considering applying for a mortgage and entering the housing market.

In other words, it’s primarily an educational tool, not what will actually be used to qualify you or price your Florida home mortgage loan. In spite of this fact, prominently displayed on TrueCredit.com is the statement that the TransUnion score is how you may be viewed from a lender’s perspective.

That’s all well and good… unless your lender happens to be pulling only your FICO as you apply for a Florida home loan — as most probably will.