Sherman McDaniel is a Realtor with Coldwell Banker, serving the Washington, D.C. and Newport News areas since 2001. She has been consistently recognized as a Coldwell Banker “Top Producer” and was welcomed into the Circle of Excellence in 2003 for overall customer care in representing sellers as well as buyers. Before become a Realtor, she worked in state and local government for more than 27 years. The following is sponsored content authored by Ms. McDaniel.
Looking to shorten your commute? Maybe buy a home closer to work?
Credit Karma entices you to check your credit score. Some credit card monthly statements show your credit score and you routinely get invitations to sign up for a service to notify you when something will impact your credit score. Fantastic! Especially if all indications are that you have a credit score in the upper 800s. The world is your oyster, right? You could qualify for a mortgage with your eyes closed and one hand tied behind your back.
Not so fast. None of your credit scores, which are generated by an internet algorithm, will be used by a lender to evaluate your credit-worthiness while applying for a mortgage. These credit scores won’t affect the interest rates you will be quoted or the lender fees that will be charged, regardless of whether your application is accepted.
The Consumer Financial Protection Bureau has entered into a settlement agreement with Experian based on the bureau’s findings that Experian “deceptively marketed credit scores to consumers by misrepresenting them as being the same as what their lender would use in determining whether and on what terms to offer a loan.”
The Importance of FICO Scores
In determining your credit-worthiness for a mortgage and their risk factors, mortgage providers, (brokers and direct lenders) use what is called a “tri-merge” credit score. To create the tri-merge score, mortgage providers take the scores provided by the three major credit-reporting agencies (your FICO score) and use the middle of the three.
Fannie Mae and Freddie Mac mandate the use of the FICO scores. The higher the FICO score, the lower the risk to the lender, so the more attractive your interest rate will be and the lower the cost to you overall.
To complicate things even more, not all FICO scores are created equally. There are many “models” for FICO scores that have evolved over several years and each “model” has its own components.
Which FICO Model?
The most recent FICO model is 9, while the most widely used model is FICO 8. However, the majority of mortgage providers use the older models that are specific to Fannie Mae and Freddie Mac, which have not yet updated their respective scoring models. The differences between outcomes using the different models may not be substantial, but they could be significant for some borrowers.
If you are considering entering the housing market, especially one as competitive as Washington, D.C., it’s imperative for you to shop around for a mortgage provider who will deliver the best rates and the best package for you over the length of the loan. Ask each mortgage provider which model was used to generate your FICO score. Under no circumstances should you give anything but passing consideration to a generic score available to you through any source other than the lender providing you estimates of mortgage rates and costs specifically prepared for you.