Credit Score Changes will Affect Mortgage Borrowers

The credit score is perhaps the most important component in determining one’s mortgage eligibility. And yet, it remains shrouded in mystery, ever-changing, and generally incomprehensible to most borrowers. Few understand how it is calculated, and yet this number will single handedly determine whether you can obtain a mortgage, and if so, at what rate.

One of the problems with the credit score is that it is always changing. First of all, that means that your credit score will change over time (sometimes from day to day, and certainly from month to month). Since lenders are now required to verify your credit score a second time immediately prior to closing, any fluctuations will have to be reflected in the loan terms.

Second, that means that the algorithm that is used to determine your credit score is periodically adjusted to reflect changes in borrowing patterns. “In late October, both Fair Isaac Corp…and VantageScore Solutions…outlined modifications they were making to handle the vast credit disruptions caused by the housing bust, the recession, high unemployment and behavioral changes by consumers.” For example, they have found that prime borrowers have defaulted at greater frequency than their credit scores predicted, and have tweaked their formulas accordingly.

Most consumers who want to obtain their credit score go through AnnualCreditReport.com, which was created in conjunction with a Federal Law that mandates free access to one’s credit report. Unfortunately, this site is basically useless, and will provide you only with your credit history. While it’s worthwhile to double check this document for errors, it won’t yield much insight into your credit score.

The website will make available your credit score, but only if you sign up for credit monitoring (a pay service with a free trial period). But even this is basically a diversion, since this particular credit score is calculated using different parameters and a different scale from the credit score that your mortgage lender is using. In fact, the same might be true for any credit score that you pull off the internet. The only way that you can access a relevant credit score is straight from the source, through FICO, whose credit score algorithm is used by most mortgage lenders. Again, you will be required to sign up for “credit monitoring” a dubious service that you would be wise to cancel before the free trial period ends.

Ultimately, the only credit score that matters is the one that your lender uses as a basis for accessing your credit risk. You might be disappointed if you used a consumer credit score from the internet to estimate how much house you can afford to buy, only to find out that your lender is using a much lower credit score, and that your interest rate will be higher. If your loan application is rejected, federal law requires that your lender provide you with a free copy of your official credit score, but this will hardly serve as consolation for most borrowers.

While the web is filled with tips for improving your credit score, most of these suggestions are self-evident and come down to managing your debts and paying your bills on time. Otherwise, it is basically a crap-shoot. You can plead with your lender to consider other factors, but in the end, your application will be made or broken based on the nuances of the credit score formula.