When is your “credit score” irrelevant to buying a home or refinancing a mortgage? A new federal legal regulation with a major credit bureau has the answer: the only score that matters is the score your lender uses to assess you, not a random score you got on a website.
Anything else you might buy or see – there are dozens of them on the internet – may be interesting, but they won’t affect the interest rates you are offered, the fees you are charged, or the approval or approval of your request. rejected.
The Consumer Financial Protection Bureau’s new legal rule alleges that Experian, one of the Big Three credit bureaus, “deceptively marketed credit scores to consumers by presenting them” as “the same” as what their lender would use to determine whether and on what terms to offer them a loan.
In fact, the bureau said, the scores Experian widely advertised were its own proprietary “educational” scores that virtually no lender uses to make credit decisions.
Experian’s promotions have appeared on third-party websites, banner ads and display ads, direct mailings, and sites such as FreeCreditScore.com, FreeCreditReport.com and CreditReport.com, as good as AnnualCreditReport.com.
As part of the settlement, Experian was fined $ 3 million. The case follows Consumer Financial Protection Bureau settlements in January over similar allegations with other national credit bureaus – Equifax and TransUnion – in which they were to pay $ 17.6 million in restitution to consumers and pay $ 5. $ 5 million in fines. TransUnion and Equifax have been accused not only of misrepresenting the usefulness of their internal academic results, but also of luring consumers into “expensive recurring payments for credit-related products with false promises”. All three offices have denied any wrongdoing.
Which brings us back to mortgages. If you’re like many buyers and owners, you’ve browsed online locations and ordered your sheet music, often for free. They can be linked to credit card offers or to credit monitoring and identity theft protection services.
A site may have said your score was 788, ranking you as “excellent” on their scale. Another may have said you look even better – your credit score is 801 and you are one of the credit elite.
Armed with these seemingly excellent scores, you begin to check out the offers of mortgage companies. With an 801 you say to yourself, hey, I’m bulletproof. I am a prime candidate for the best mortgage deals.
Then you apply for pre-approval from a lender and get the sobering news: your average FICO score (lenders often pull scores from all three bureaus) is 716, and that’s what we need to use. to set the price of your loan. The score is correct, but it is 85 points below what you thought you were and below the threshold for the best interest rates and mortgage terms.
FICO scores, which are predominant in the mortgage market and mandated by giant investors Fannie Mae and Freddie Mac, range from 300 to 850. Higher scores mean lower risk for the lender. Lower scores can cost you dearly. According to a national survey conducted on March 23 for FICO by Informa Research Services, a mortgage applicant with a FICO 765 would get an average quote of 3.8% on a loan of $ 300,000 with a monthly payment of principal and interest of $ 1,405. The same applicant with a FICO of 650 would be assigned an average rate of 4.9% with a monthly payment of $ 1,589 – $ 184 more per month.
But here’s a little complication: The FICO score your lender pulls for your mortgage application might not be the same as the FICO score your credit card company might send you each month online. Or, surprisingly, it might even be different from the FICO score you get MyFICO.com.
That’s because FICO has introduced several models over the years, each with what the company describes as consumer-friendly improvements. The latest is FICO 9. The most used is FICO 8.
But most mortgage lenders use the older models specified by Fannie Mae and Freddie Mac. The differences in older to newer scores may be small for many applicants, but could be significant for some. Fannie and Freddie are considering updating their scoring models but haven’t done so yet.
Bottom line: Ask your loan officer what model was used to generate your FICO scores. And never rely on generic quotes available online as part of your mortgage planning process.
Ken harneyThe email address for is firstname.lastname@example.org.