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Not All Credit Scoring Models Are Created Equal

Finding a first-time homebuyer, who actually has the necessary credit score to qualify for a mortgage, is becoming more difficult by the day. According to a study published by the Federal Reserve Bank of New York, more than one-third of Americans have a credit score below 620. What is even more alarming is the CFPB’s study that found in addition to those with poor credit, there are another 45 million adults who are either un-scoreable or who do not even have a credit score.

As consumers try to deal with their credit challenges, they are being bombarded with messages about their credit scores from many different sources.  Some of these companies have even created simulated scores which many consumers find misleading and confusing, especially those who rely on those scores when seeking out financing for a new home.


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Credit Karma is one example of a company that generates scores using the Vantage scoring model (Vantage score 3.0).  Consumers frequently rely on the scores that are generated by this and similar companies before they apply for home or auto financing, only to find out that lending institution utilizes credit reports and scores that were generated from a completely different scoring model. Many people are often surprised to learn that their actual credit score is drastically different from the generated score they received online.  One reason for this is that many simulated or alternative scoring models don’t take the same information into account as the reports on which lenders rely. 

Consumer Example of conflicting credit scores: Potential borrower contacts lender and has lines of credit but DOES NOT show a score.  However, when the potential borrower pulled his credit off a website for free, he had a score in the mid-700’s.  

His specific report pulled by the lender shows NO PAYMENT FOR 8 years.


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The simulated or alternative model could be basing it on the positive payment history, were as the repositories are basing it on current activity.  A FICO Credit Score is a snapshot of what is going on today.  Over the last 8 years, nothing has been going on.  Therefore, no scores appear for this potential borrower. 

Can you picture the confusions and frustration when the lender tries to explain that this borrower doesn’t have a credit score?

It is also important to confirm that your personal information is correct with the bureaus as sometimes information is pulled in and/or NOT pulled into your report.  If something doesn’t report, it’s not included into your FICO score.   


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Therefore, It is critical to help consumers understand that not all credit scores are created equal, especially as it relates to obtaining financing for home ownership.

Here is a brief overview of different credit scoring models, the differences between actual and simulated credit scores, and the importance of knowing your actual consumer credit scores. 

FICO v. Vantage

The FICO score is a score that was formulated to evaluate creditworthiness. It is promulgated by Fair Isaac Corporation and was first utilized by lenders in 1989.  Your FICO score is calculated based upon the following five factors: 1) Payment history, 2) Credit utilization ratio, 3) Length of credit history, 4) New credit accounts, and 5) Credit mix. 


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In 2006, to compete with FICO, the three major credit bureaus developed the Vantage scoring model. This model calculates credit scores using some of the same factors as FICO, but also incorporates some additional information. The Vantage factors include: 1) Payment history, 2) Credit age and mix, 3) Credit utilization, 4) Balances, 5) Recent credit applications, and 6) Available credit. Although Vantage has been making a push in recent years, FICO scores remain the industry standard across various financial sectors for evaluating consumer credit worthiness.  

Actual v. Simulated

It is important to note the difference between actual credit scores and simulated credit scores. There are many websites, such as Credit Karma, that purport to provide consumer credit scores for free. However, consumers should be weary of putting too much credence or relying too heavily on those scores.  

A simulated score is calculated based upon actual information in a consumer credit report, but it may not necessarily reflect your true credit score, which is promulgated by the FICO or Vantage models. There are many instances in which consumers review their simulated scores prior to applying for loan or other financial product, only to find out later that they do not qualify because their actual score is lower than the simulated score. 

Importance of Getting Actual FICO Score

According to FICO, 90 percent of “top” US lenders use FICO scores when evaluating the credit worthiness of applicants. As the predominant scoring model in the US, consumer FICO scores will, more often than not, determine whether a consumer will qualify for the loan or financial product for which he or she is applying. It is imperative that consumers keep this at the forefront of their minds when devising a strategy or making a decision about when and whether they should apply for a mortgage or a car loan. 

Whenever a consumer applies for financing, and the potential lender makes a hard inquiry (pulls the consumer’s credit), that consumer’s credit score is negatively impacted, and will decrease as a result of that inquiry. If a consumer believes that he or she will qualify based upon the simulated score, but is later denied, their credit score will take a hit unnecessarily. 

Because of the deleterious effect that hard credit inquiries have on a consumer’s credit profile, it is imperative that consumers know their actual credit score prior to applying for loans. There are companies that offer monthly subscriptions, which include actual consumer FICO scores that are updated monthly. This type of service is invaluable for those who are serious about achieving and maintain credit health, and eliminating any guesswork when applying for loans.

In addition to accessing actual credit score, here are some ways in which consumers can build and/or improve their credit profile.

Two quick way’s to create a score:

Start using a credit card, if you don’t already. Using a credit card and paying it on time every month is a great way to begin establishing credit history.

For those accounts that are open, make sure to use them periodically.  If you don’t use them, the creditor might close the account down which could have a negative impact on credit score.  

Why do these two ways impact ones credit:

30% affects Utilization. It is best to have several accounts with low balances distributed then it is to have fewer accounts maxed out. To figure utilization: Balance (divided) by Credit Limit = percentage. Lower than 10% recommended per account, this is one of the fastest means for increasing the over all credit score.

15% affects Established History. The longer you maintain open accounts with creditors the better. When first starting out of course this is not easy; but this is where getting added as an Authorized User to another persons established credit comes in best. Remember that the contributor must have an account that has long history; clean payment record; high credit limit, and low balance. Also need to check with the creditor to insure that they have a policy to report authorized user accounts to all three major credit-reporting agencies. Anther great option is getting a secured credit card that reports to all three bureaus.  Try to find options for secured credit cards that do not require to pull credit. 

SPECIAL NOTE to quickly build accounts: Authorized user accounts are the best way to go; since you are not legally responsible for the debt rather than Joint or Co-Signer accounts. Also, if this account starts to report negatively; these accounts are usually easier to remove from the credit reports by either contacting the creditor or requesting termination of the relationship; or disputing through the CRAs.Just because you can pull a score off the Internet does not mean that it is the score that a lender will use to qualify you for home financing.  Remember, not all credit scoring model are the same, especially as it relates to the mortgage industry. 

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Closing The Page On 2013

Origination vendor Ellie Mae released its Origination Insight Report for December 2013, as well as an infographic of key mortgage statistics and trends for 2013. The report draws its data and insights from a robust sampling of the significant volume of loan applications that flow through Ellie Mae’s Encompass LOS and the Ellie Mae Network.

“Purchases represented 54% of closed loans in December 2013, which was double the share of at the beginning of the year,” said Jonathan Corr, president and chief operating officer of Ellie Mae. “Meanwhile, refinances ticked up by 1% over November to 46% in December, helped in part by the average 30-year note rate staying below 4.6%.”

To get a meaningful view of lender “pull-through,” Ellie Mae reviewed a sampling of loan applications initiated 90 days prior (i.e., the September 2013 applications) to calculate an overall closing rate of 54.3% in December, up from 53.1% in November 2013.

“HARP-related refinancing activity increased for the second month in a row, as conventional refinances at 95%-plus LTV rose to 12.1% in December, the highest they’ve been since August 2013,” said Corr.

The Origination Insight Report mines its application data from a robust sampling of approximately 57% of all mortgage applications that were initiated on the Encompass origination platform. Given the size of this sample and Ellie Mae’s market share, the Company believes the Origination Insight Report is a strong proxy of the underwriting standards that are being employed by lenders across the country.

Corr added, “2013 closed with the loosest credit requirements of the year. The average FICO score for all closed loans last month was 727, 11 points below the 2013 average of 738 and 21 points lower than December 2012, when the average was 748. Last month, 31% of closed loans had FICO scores below 700, compared to 21% in December 2012.

“In addition, both back-end DTI (39%) and average LTV (82%) for December were at their highest points for 2013.”

TLI214-Ellie-Mae-Infographic

Financial Literacy

*Financial Literacy*
**By Lew Sichelman**

LewS***It’s incredible how much the American public doesn’t know about the very basics of their own financial well-being. Credit scores are a great example. According to a survey from the Consumer Federation of America, a large swath of otherwise decent, law-abiding citizens don’t know jack about their credit scores. And that’s too bad, because as CFA Director Stephen Brobeck pointed out, that’s going to cost them a boat-load of money.

****“Low credit scores will often cost car buyers more than $5,000 in additional finance charges and cost home purchasers tens of thousands of dollars in additional mortgage loan costs,” Brobeck said. “And low scores are likely to limit consumer access to, and increase the cost of, services such as cell phone service, electric service, and rental housing.”

****A more recent survey by the American Bankers Association found the same thing: Most consumers don’t even know their own score, despite its importance not only in determining whether they can get credit cards, auto loans and mortgages, but also in employment and insurance decisions.

****The survey of 1,000 adults conducted for the ABA by Ipsos Public Affairs, an independent market research firm, found that only 42 percent of consumers know their credit score. Fifty-six percent of respondents indicated they did not know their credit score, and 2 percent did not answer the question.

****In the CFA survey, which was done in conjunction with VantageScore Solutions, respondents were asked a wide-ranging set of questions about scoring. As many as two out of every five answered incorrectly.

****Here’s some of the highlights, or should I say low lights:

****>> 40 percent do not know that credit card issuers and mortgage lenders use credit scores in decisions about credit availability and pricing.

****>> 43 percent believe that personal characteristics such as age and marital status are used in calculating credit scores.

****>> 35 percent don’t know when lenders are required to inform borrowers of the credit score used in their lending decision.

****>> 26 percent do not know key how to raise or even maintain their scores.

****>> 36 percent believe that credit repair agencies are always or usually helpful in correcting credit report errors and improving scores.

****Hey, c’mon people, this is basic stuff. But it’s only basic because you and I deal with it on a daily basis. Credit scores have become part of the mortgage fabric. But ordinary people who buy houses only a few times in their lives don’t know any better.

****They should, though. And that’s why I believe financial literacy courses should be mandatory in high school. People need to know how to balance their checkbooks, and how to deal with credit. Yet, it surprising how few young people are taught those basics at home. It might even be shocking to find how many of their parents can’t perform those simple tasks, either. So it is left to our schools to pick up the slack.

More Of The Same

*More Of The Same*
**New Data**

shutterstock_74047042***Drawing on data from the May Origination Insight Report, the company’s president and COO Jonathan Corr, believes, “On a month-over-month basis, the market in May mirrored April, and credit quality, as measured by FICO, LTV and DTI, continued its slow loosening that started in January 2013. The refinance-to-purchase mix stayed at 58% vs. 42%.”

****To get a meaningful view of lender “pull-through,” Ellie Mae reviewed a sampling of loan applications initiated 90 days prior (i.e., the February 2013 applications) to calculate an overall closing rate of 53.5% in May 2013, up slightly from 53.2% in April 2013.

****“The average interest rate on a 30-year loan was 3.747 in May, down from 3.808 in April. An interest rate dip often prompts borrowers and lenders to lock in their refinance rates and close,” Corr noted. “While this probably factored into the steady pull-through rate in May, it didn’t affect days to close, which registered their lowest point this year (44 days in May).”

****The report draws its data and insights from a robust sampling of the significant volume of loan applications—more than 20% of all originations in the United States—that flow through Ellie Mae’s Encompass360 LOS and the Ellie Mae Network.

****“For the past few months, we’ve noted a gradual decline in high-LTV refinances that are most likely HARP-related,” said Corr. “In May, for the first time this year, HARP-related refinancing activity fell below 10% to 9.4%.”