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
Ines, if a person’s credit is pulled multiple times by mortgage companies within the same 10 day period, the credit pulls are bundled and only count as one pull. Loan Officers that did not want people to shop around or even talk to another Loan Officer created this myth about their credit scores dropping if someone else pulled their credit.
As far as the change in the credit score when it is pulled, it could be any where between 0 and 1 or 2 points, there is not set rule. I have pulled credit on borrowers more than once for several reasons and still come up with the same score. Most of the time the change in the score is because the borrower did some thing in between and not because of the credit pull.
The bigger danger with multiple pulls is that several people now have all of your personal information and you are opening yourself up more to identity theft.
Good post, George. Ggeat information to share with buyers, and so I can talk more intelligently with them about these issues. I don't try to be the expert but having this sort of info will be most helpful.
Jeff
Buyers will still blame the loan officer even if we share this information with them. After all a few late mortgage payments, can't be the reason. LOL
Seriously, I hope they standardize. If they do, why will we need three agencies?
Hello George
I always enjoy reading your posts and hope that all is well for you.
Isn't this what the VANTAGE Scoring process is supposed to address?
In my experience, I'm seeing that it is perhaps a difference in the actual pulls based on who is pulling them. Our pulls as mortgage brokers are supposedly the most comprehensive and therefore the score is different since it calculates using all the credit factors and some pulls don't.
...And the winner is:
Mortgage George!!!!
Brother this is excellent. Once again "Are you sure you don't want to move to Florida?" SVW...
Awesome post!
I would think that with all the capitol these credit companies have they wouldn't drop your score a few points after pulling your report. I think it would bring them more commerce no?
Nice Post George. Will we see some Information on Cleaning Credit?
George,
Great post. I'm looking forward to your next post on VantageScore.
Great post. Credit scoring always seems to be a mystery.
George-
Outstanding post. There is good quality reading here and much info to share. Thanks
Awesome information! This helps me better explain to my clients the credit reporting problems!
The more we know...the better service providers we become. Thanks for this, it will prove useful.
www.careerswithexit.com
Empathy > Ego
George.... I didn't read any but 2 comments.... but Mark Flanders hit the nail on the head.... yes, this was an AWESOME post.... but most importantly, you mentioned that there are different models out there. To be honest, I didn't learn this aspect up until 3 to 5 years ago. So much going on in regards to the mortgage business, this was one place where I didn't read up on or go to those classes.
Again... it was detailed and well-written. Can I use this blog for my own blog page that I have just started? Please let me know. thanks
As always, full of great information to share with buyers! You just keep getting better!
George... I read Ines's question and your answer. Now, I have been told and even in a class, that it's 14 days that you can have multiple pulls.... but again, many people, even the agencies themselves don't know everything. I am just wondering...
In regards to your answer... if you don't mind, I wanted to add to this. You are correct in saying that you do open yourself up when you give your credit info out. But another that I have experienced.... YOU as the CONSUMER need to be careful because some loan officers will pull your credit now.... and sometimes 30 days later.... there are many reasons for this, but be careful. Join a service that tells you each time your credit is pulled. When an inquiry is made, you are notified by e-mail. Also... if the lender is a true broker, they sometimes shop your loan around and those companies, especially on the sub prime side, pull your credit when they get the file. This can also drop your score if it's outside that 10 or 14 day rule. Just an FYI....
Randy, I am not sure why we would need three then or even why we really need three now. But each of the three major Reporting Agencies seem to have a larger presents in deferent parts of the country. For example TransUnion is the main Reporting Agency in the Northeast. I forget if it is Equifax or Experian, that covers more of the South, and other the West. It is probably good to also have some competition. When we meat with our two Credit Report Co. later this month I will ask them that.
Mark, you are right there are many people in the Lending and Real Estate Industry that are not aware of the different models, but knowing it take away a little bit of the mystery that surrounds Credit Scores.
Ed, thank you. I have not seen any new Posts by you also in the last few days, but I always look for them.
Bryant, it is a shame that you had to do that much running around to get information that people in the Mortgage Industry should know, especially Credit Companies since that is all they deal with.
Jennifer, you are welcomed to use this Post and I hope that it is useful to your clients.
David, hopefully VantageScore will be adopted by all three of the major Reporting Agencies especially since it is a joint venture by all three. I will be Posting on VantageScore next week.
TLW, I am happy that I did not dissapoint. It is always good to here from you little Sis.
Luke, the main reason why Credit Scores drop after a pull is because each pull suggests to the Reporting Agency that new credit is being applied for, therefore a potential for more risk. This is particularly true with credit cards. But in the case of credit pulls by Mortgage Companies, the Reporting Agencies realize that the borrower is not out purchasing multiple homes using multiple Mortgage Companies, that is why those pulls have little or no effect.
Michell, I was not planning on doing a Post at this time addressing what people can do to clean up their credit, because there have been other Posts on AR addressing that issue, but if people would like me to put a Post together on this, I am willing to do that.
Dale, that is a good comparison, I had never looked at it that way.
Carole, I also look forward to that, it would be a welcomed change.
Kip & Tamara, I will hopefully have that Post done by the middle of next week.
Jason, hopefully this Post has taken away a little bit of the mystery.
John, Thank you.
Tracy, if we all share our information with each other, than we will all be better prepared to help our clients.
Andy, well said, and this site is a very good tool in obtaining information.
Jeff, you are right, there is so much information in this Industry that it is hard to stay up on all of it. And yes it is OK for you to use it on your blog page.
Andy, I hope it comes in handy for you.
Linda, I always appreciate the Great Carnac's comments.
Jeff, I have heard both 10 & 14 days used, so I use the more conservative number. Thanks for the add-on that is the reason why people should be careful who they give their information to. They really should only give their info to people they trust or who have been recommended by people they trust, other wise they leave themselves open to what you mentioned.
Joan, the present Credit Score system is not perfect and mistakes are still made, but it is better than what existed before the use of Credit Scores. Hopefully it will be improved on is VantageScore is adopted. As far as removing errors, we have a good system in place for disputing Credit Report errors. Our Credit Report Companies are very good in assisting in this, and can usually have the matter cleared up within 30 days.
George,
Great stuff. Only the law was changed in 2003 extending the number of days for "same industry inquires" to count as one to 90 days....They finally realized that it may only take 10 days to buy a car but it can take 90 days to find a house and get a mortgage.
Rob K Blake
Rob, I just doubled checked this with two of my Credit Report Companies to verify what I understood about the 90 days. Most Mortgage Companies do not show credit inquires over 90 days on the Credit Reports that they run. However, in most States those inquires do not come off of a persons credit history for 2 years, New York is 5 years, and there are probably other states that it might also me different in.
But all this is different than "Bundling" inquires within a 10 or 14 day period. Also those inquires are only "Bundled" if they are by the same industry like Mortgage, or Auto Dealer, etc.
GEORGE -
Another good post on the subject of credit reporting...
The local credit reporting agencies also utilize various versions of the different reporting models as well.
Scores will always vary due to the difference in the underlying information used even in the same model.
The scores produced by the VantageScore model will also vary from each of the credit reporting companies.
Interesting that the 3 major reporting companies will offer this product in addition the existing standards.
Too many it is a way to clarify the reporting process - to others it is another product and revenue stream.
Thanks for the post.
George,
So there is method to the madness, afterall. You are shedding light on the darkness and rescuing the unfairly maligned loan officer.
One would think the the credit reporting agencies over the years would have made their reporting procedures more transparent. I believe they would have served both themselves and the public well by doing so. For instance, don't you think if people understood better what truly made their credit scores go up or down they might become more responsible and not be so angry at people like loan officers and the credit reporting agencies themselves? Thank you for educating us.
Lewis, I agree, there is so much to the Credit Reporting System that the more I learn about it the more questions I have.
Brian, I would hope since VantageScore is a cooperative venture between the big three Reporting Agencies, that differences would be minimal. We need to move to a system that is more consistent, and I hope that VantageScore does that. Also you are right, if there is a way to make a dollar in all this, the three Reporting Agencies will surely take advantage of it.
Eloise, yes it would be nice if the three major Reporting Agencies were more upfront about what affects the credit scores, but they don't, and a lot of it is still a bit of a mystery. But even with the obvious things like paying your bills on time, many people still pay their bills late and then act surprise that their credit is bad. I could write dozens of blogs on this alone. However, if we share what we know about this subject, then at least we can try to help people even if they do not listen sometimes.
Phil, thank you, that means a lot coming from you.
It was a good week, but the challenge is putting a couple of them back to back.
Excellent article. I have been trying to research credit scores and your article was great. I pulled it from FICO and did not get Transunion. The difference was almost 50 points between the two agencies, even though I do not have a single negative entry and from the same FICO website. Yes one agency had more records than the other, but such a large difference? Is one agency usually better than another? Also, even though they claim to ignore multiple inquiries at the same time, all show up in the credit report? How do we know what they are ignoring? What if the same creditor makes 3 inquires outside the 14 day window (0ne while approving the loan and before paying for it"?
Also, I wanted overdraft protection and my credit union wanted to pull a report. I wanted to get an insurance quote and they wanted to pull a report? How do these inquires matter? If all I want is emergency short term protection, not a real loan (I had suggested they link it to my money market account but the credit union insisted that they will not offer a loan facility). For example, when I want an insurance quote, I am not asking for credit but is it still an inquiry? Everyone wants to pull your credit history today but it seems that it will affect us?
Ashok, yes you don't want your credit pulled unless it is really needed to be pulled, but each pull that is not bundled does not have very much of an impact on your credit score. Where that becomes important is if your score is borderline and it gets pulled, then the one or two points could make a difference.
As far as the differences between the three major credit reporting agencies, it isn't that one is better than the other, it depends on how they receive the information. For example they do not all get their information at the same time. I had a report I ran yesterday that Transunion had already received information on a late payment, but the other two did not receive it or were not reporting that yet. As a result the Transunion score had gone way down, while the other two stayed the same.
No one knows the formula that each major reporting agencies uses, we have a good idea, but they are the only ones that know it, and it does vary between each one.
Mortgage George...
I am learning so much from this post. I just thought you would want to know that.
According to the studies I've done <smart> people learn something new everyday. Thanks for helping me with that goal.
TLW...ROAR!
TLW, I try to learn something new everyday, but sometimes it seems like I have to forget two things in order to learn one new one.....LOL
Glad I could be of help in you goal!!!
George,
Very well explanation, you could not do it better :)
Now, you are seeing that I am reading your blogs uh ? , sorry for delay, but there are a lot and now it is your turn, and remember that I was away for a while, so just imagine who many blogs I missed and also there are new rainers that I missed too.,
Okay, this may sound complicated, but maybe you can help.
We are trying to buy a house and our credit was not good. We recently paid off 4 different collections, and I sent paid in full letters to all three companies. EX EQ TU
Today I ran a 3 in 1 credit check, through transunions page...I think it was true credit, because I recieved a letter from them with my report saying that the accounts had been updated.
The scores the reported were...TU 647 EQ 588 and EX 575 which it didn't report EX or EQ as updated yet.
Then in the mail I got a notice from experian saying that they had updated the accounts, which they did, but they forgot one so I go to the website listed on the report they sent me and punch in the number on the report, I dispute it and it asks me if for 5.95 I want to see the score on this report. I pay for it and it says the score is 719???
When we had a lender check our score about 2 months ago the middle score was 604. Of course we are trying to get to 620.
Why did the transunion site report the score for experian as 575 and the experian site report it as 719 on the same day? I am confused and I don't know which experian score to believe?
Also, the equifax site is reporting his score as 612, but the TU said it was 588??
Can you give me some insight??
George -- thanks for taking the time to explain this. I find this area quite confusing -- It also is very difficult to fix a mistake -- I have had a few clients have a terrible time working to correct information (e.g. similar or same name - but not their debt). Is there some type of reform to help consumers clear thing up faster!
Mr. D. I do not think that the mortgage company is trying to pull anything over on you because there are always differences between the Credit Report that you pulled (Consumer Credit Report) and the Credit Report that Mortgage Companies pull (Mortgage Credit Reports) both will have different scores because they give different weight to things. From what you are telling me the only thing that I can see that could posibly raise your score quickly is if you are near your credit limit on the credit card that you have and you pay it down to less than 1/3 of the limit.But I do think that you have a problem with a NO-DOC loan if you have to name an employer and state income, please read this blog "Stated Income Borrowers Watch Out For the ....... 4506" What you need is a No Income Loan, and the rates will be higher because it is a risky loan, after all you are saying that you do not have a job, and no income.
Your best bet in my opinion would be to take any job you can get, while continueing to look for the kind of job that you want (even a job at a fast food place). You do not need to show much income in order to qualify for a $32,000 Loan and now you would not need to go "No Income", and the interest rate would be much lower. Feel free to call me if you want to talk about this further.
George,
The current system needs streamlining and with that the consumer complaints against lenders would stop regarding these score discrepancies. The VantageScore is supposed to rival FICO one day, so let's see how it fares. Very useful info.
Esko, I don't think that they will ever have the perfect system, but anything that would get all three agencies to use the same criterion in reporting their scores so that we do not have this discrepancy between them would be a major plus.