George's Blog

The three most important things in obtaining a mortgage are Income, Debt, and Credit Scores.  The first two are self explanatory, but the third “Credit Scores” are not as easily defined.  This is why it is important for those of us in the Mortgage and Real Estate Industry to be well informed on how Credit Scores work, so that we can better assist our Borrowers and Buyers in obtaining the house of their dreams.

Last Friday I started my first Post  “Credit Scores Where Did They Come From & What Are They???”  in hopefully helping others become a little more familiar with this very important component in the mortgage process.  The first Post dealt with some of the history of “Credit and Credit Scores”, as well as an introduction into some of the “Credit Score Models” that are in existence today.  Some of the better know models are the Consumer Models also know as Educational Models, Collection Models, Bankruptcy Models, Auto Models, and the one that those of us in the Mortgage and Real Estate industry are most concerned with the Mortgage Models.  In this Post I want to go a little more indebt into the two models that most affect the Mortgage and Real Estate Industry, Consumer Models/ Educational Models, and Mortgage Models.

How many times have you heard a Borrower, or Buyer blame a Loan Officer for having significantly lowered their Credit Score because they pulled a new Credit Report on them?  They are convinced that the lower score is the Loan Officer’s fault, because when they ran their own Credit Report it was 30 to 60 points higher.  Therefore the Loan Officer has to be at fault, that is the only explanation that they can see for their Scores dropping that much.  It is understandable for a Borrower or Buyer to feel this way, however, they are incorrect.  Credit Scores do not drop by huge amounts just because a Loan Officer pulled a new Credit Report, in fact the change is minimal if any at all.  The reason for the difference is because of the different Credit Report Models that were used by the Borrower/Buyer and the Loan Officer to pull the Credit Report.

When someone pulls their own Credit Report through one of these “Free Credit Report Sites” the model that is used is a Consumer Models/Educational Model.  But when a Loan Officer pulls that same persons Credit Report the model that is used is a Mortgage Model.  Even though the information used by  these two models is the same, the weight that is given to each “Trade Line” is different.  A Mortgage Model is going to place a higher weight on “Trade Lines” that have a greater impact on a mortgage then a Consumer Models/Educational Model will.  Also a Mortgage Model will be more conservative in its Scoring than a Consumer Models/Educational Model.

There can also be a big fluctuation in Credit Scores even between the three major Credit Reporting Agencies Equifax, Experian, and TransUnion.  The reason for this is because not all Creditors report their information to all three Reporting Agencies, so a Reporting Agency might be basing its score on incomplete information.  Even when the information is the same the Scores are slightly different, because each one used a slightly different formula in arriving at their score. 

It is also not unusual to see a Creditor reported on more than one Trade Line.  For example Equifax, and Experian might be reporting on the same Trade Line, but TransUnion on a separate one.  One of the main reasons for this is that Equifax, and Experian might leave out the last four digits of an account number, while TransUnion might show the whole account number or even just the last four digits.  The Credit Limits and Balances will be the same, but the account number will appear differently.  So since the account number is not being reported exactly the same by all three, it will show up on the Credit Report in more than one Trade Line.  To someone who does not know this it will appear to be a duplicate amount on the Credit Report, when in fact it is not.

There is a major effort under way to correct the discrepancy in Scores between Reporting Agencies, by implementing a system by which all three major Reporting Agencies will use one scoring formula.  This new Scoring system is known as VantageScore, and has been under development since 2005.  VantageScore will have many advantages over the present Credit Report System, because VantageScore will be more consistent, and easer to understand.  I will discuss VantageScore in more detail in my next Post.

I hope this Post has helped to clarify some of the mystery surrounding Credit Scores and Credit Score Models, as well as eliminate some of the myths about the cause for the fluctuations in Credit Scores.

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Info about the author:

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com

I have read a number of Posts here on ActiveRain on Credit and Credit Scores, and I have written Posts on this same topic myself.  All of the Post that I have read or written provided good information on how to improve your Credit, or on what effects your Credit Scores.  But I have not seen any Posts on “where Credit Scores came from, what they are, and why we have them”.  So I will attempt in this Post to begin to do that.

Before Credit Scores were established, a person was given credit solely based on another human being’s judgment and opinion.  Each lender based their decision on what they knew about a particular person from their personal experience, or by information that someone else provided them with.  This was not a very good or accurate way of making such an important decision. 

So over a period of time lenders started to establish a system that would assign points to different components of a person’s Credit History.  By doing this, a lot of the personal opinion was removed from deciding who a lender would give credit to, and who they would not.  But this still did not completely remove a lender’s personal bias from the decision, and it was still a very slow process.  Lenders continued to refine this point system, and by the 1980’s they began to develop the different Credit Models that are in place today.  Since then much of the human influence was eliminated from the Credit Scoring Process.  Score began to be generated by computers that were able to compute information accurately, and very quickly.  Because of this lenders are now able to make credit decision solely on facts, without human prejudice involved in their decision.

First lets start with what are Credit Scores?  Credit scores are numbers that lenders use to help them decide if they should lend a person money or make credit available to them, and how likely is it that they will pay it back. Credit scores are sometimes also referred to as “Risk Scores” because they represent the level of risk that a borrower will repay the money borrowed in the manor and time that it was agreed upon.  Credit Scores are generated through statistical models which use information that has been collected on a person’s credit report.  These scores are produced when a lender pulls credit on a borrower, and they are included with the borrowers credit history.  However, the scores are not made a part of the borrowers credit history, because they only represent a snap shot of that moment in time.  

As a borrowers credit information changes (payments, new accounts, etc.), so does their Credit Score, how and how much a Credit Score changes depends on the “Scoring Model that is used.  There are many different models Consumer Models also know as Educational Models, Collection Models, Bankruptcy Models, Auto Models, and the one that the Real Estate industry ia most familiar with Mortgage Models.  Credit Scores vary based on what model is used, and even sometimes within these models.  For example most Mortgage Companies and Banks will use a borrowers middle score to determining their credit worthiness and level of risk.  However, some have modified the Mortgage Model to fit certain criteria that is more important to them then to another Mortgage Lender.  For example this is the case with our Alt “A” products, they use a modified model which is stricter than the one we use for conventional loans.  So in there case we use the lowest Credit Score to determine whether or not a borrower qualifies for one of those Loan Programs.

These Credit Score Models are developed by looking at the credit history of hundreds of thousands of borrowers to determine common traits and patterns.  With this information Credit Score Models are then created by using this information to try to predict how a group of people with similar traits and behaviors will behave in the future.  By doing this they can develop models that will place different weights and values on certain criteria which has more or less impact on that particular industry.

Credit Scores are not effected by a person’s race, religion, sex (or preference), marital status, or even if the person is on some type of government assistance.  These things can not be considered in the information that makes up a person’s Credit Score.  However, lenders can take into consideration age, salary, occupation, employment history and other similar information.

Next week I will try to further explain what happens once information is collected and applied to these different Credit Models, as well as why Credit Scores vary among the three major Credit Reporting Agencies in the US, Equifax, Experian, and TransUnion.  Stay tuned for more.

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Info about the author:

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com