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Have you ever had your credit pulled by a conventional lender and you’re really close to the score you need, but just not close enough? If the answer is yes, then you’re not alone.
It’s really funny to me, after being in the mortgage business for a while now, that there is still this big mystery surrounding credit and how it affects one’s ability to borrower money. A potential borrower can monitor one’s credit report and score with the free credit reports from each credit bureau once yearly. But does that really help anybody? It will give you a general idea, but it’s never exact.
What I find is that the algorithms used to determine credit for mortgages are different than those used on a soft pull site like Credit Karma or something similar. Very rarely do they ever appear to be one and the same from my perspective.
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There are dozens upon dozens of credit companies out there that pull credit from three major bureaus — Experian, Equifax, and Transunion (to learn more about TransUnion, click here). Typically, when you’re applying for a car loan, credit card, or any type of personal property, the creditor will only pull from one or sometimes two of those bureaus. When a creditor is pulling for a mortgage loan application, they pull a report from all three credit bureaus.
Related: 3 Simple Steps to Significantly Raise Your Credit Score Within 12 Months
From my experience, most lenders use the middle credit score to determine the borrower’s creditworthiness. So if the three scores that come back are 700, 687, and 715, the 700 credit score will be used to determine eligibility. In instances where there is more than one borrower, they will use the lower middle score of all the borrowers on a loan application(s). (I’ve done loan applications in the past where there were four borrowers, all unrelated, in which case we had to use the lower middle score of all the borrowers involved on four separate loan applications.)
In instances where a borrower is applying for a home equity line of credit (HELOC), the lender may often use the middle score of the primary wage earner. So if the co-borrower needs to be on a loan because of their income but they don’t quite have the greatest credit, then the lender will still allow the loan because of the primary wage earner having the higher credit score.
Could a Rescore Help You Qualify?
One of the most beneficial things about pulling someone’s credit is the ability to do what is called a rescore in instances where the credit will make a significant difference in the pricing of a loan. There are several proprietary names that different credit companies use, but I won’t mention those here. Both Fannie Mae and Freddie Mac allow for a rescores, which makes it great when you are financing any 1-4 unit property — whether it be for your primary residence, a second home, or an investment property using conventional or government (FHA, VA, USDA) financing.
The credit report pulled by the lender will show the current credit score, a potential improvement factor, and what the potential score will look like after the rescore. Here’s an example from an actual client:
In this instance, the client needed a large jumbo loan ($1,000,000), but the minimum FICO for most investors in this case was 700. Only one jumbo investor would allow for the rescore, but we had to do it in order to get the loan done.
How the Rescore System Works
With the rescore system, there are two ways in which you can make it work. The credit company will either ask you how much you need the credit score to go up by, or it will ask you how much money you have to spend. I typically use $2,000 less, but it depends on the client and how much we need the credit score to increase.
In the above example, I needed to have the middle score of the client be above 700. You can see that Transunion reported a 701 score, so I didn’t need to do anything in this instance for Transunion. The Equifax was at 648, and there was only a potential 9 point improvement here, so nothing I could do about that score. The Experian was the one that had the ability to go up over 700, with a potential score of 707.
When a lender does a rescore with the credit bureau, the credit bureau will tell you very specific things to do. For instance, in the above example, for the Experian credit score to increase, the credit bureau said we needed to pay a car loan down to a certain number (not pay it off, but down to the exact dollar figure). The rescore also had us do a balance transfer from one credit card to another. The third thing was to pay off a small balance on a department store credit card. All in all, it cost the client about $2,300 to get the improvement in the score.
I know what you’re thinking: “That’s really cool there, Jeff, but how long does it take?” It actually takes on average 5 business days to get this done after the client does the necessary tasks that the rescore asks for. I’m sure you’re also thinking that in the above example, $2,300 was a lot of money to spend. It is, and I agree with you, but when the client is then able to take out $250,000 — because this was a cash-out refinance — it totally makes sense to spend a little to get back a lot. Not to mention, this was during the summer of 2016, and jumbo 7/1 ARM loans were in the 3.625% range, even with that low-end credit score of 700.
Here’s what the credit report looked like just one week after I initially pulled the first report:
You can see that the Experian went up significantly, from 666 to 718. Both the Transunion and Equifax stayed the same, but the new middle score was now 701! Score for the client because now they could do the loan.
In the end, I look at credit reports everyday. There are many opportunities to increase one’s score on all conventional loans going to either Fannie Mae or Freddie Mac, even jumbo loans like my example above. Generally, every 20 points in credit has a specific change in pricing (i.e. 680-699, 700-719, 720-739, etc.). So if you’re working with a lender and you need to get pricing that is just a little bit better, go ahead and ask to see if they have the potential to do a rescore. You can often spend just a tiny amount of money quickly to make a significant difference in the cost of money that you borrower over the long-term.
How about you? What are your experiences with credit rescoring? Has it worked for you?
Please post in the comments below!