Imagine being ready to buy a home.
You have steady income, money saved for a down payment and you have worked hard to improve your credit.
Then you find out your credit score is just a few points below what you need to qualify.
It is frustrating. Especially when you feel like you have done everything right.
But changes to the way mortgage lenders evaluate credit could create new opportunities for some homebuyers.
Whether you are buying your first home, have previously been denied a mortgage or are a Realtor working with buyers who have struggled to qualify, this is something worth understanding.
Why is my mortgage credit score different from the score I see online?
One of the most common questions I get from homebuyers is:
“My credit app says my score is 680. Why is my mortgage credit score different?”
It is a great question. The reality is that you do not have just one credit score.
There are different credit bureaus, different scoring models and different versions of those models. Each evaluates your credit history a little differently.
The score you see through a credit monitoring app, your bank or your credit card company is not necessarily the same score a mortgage lender will use.
For years, conventional mortgage lending has relied heavily on a set of scoring models known as Classic FICO. But the mortgage industry is moving toward a system that allows additional credit-scoring options, including VantageScore 4.0.
And for some borrowers, that could make a meaningful difference.
What is VantageScore 4.0?
VantageScore 4.0 is a credit-scoring model that evaluates your credit history differently from traditional FICO models.
Like FICO, it considers factors such as payment history, outstanding debt and credit utilization. However, it can also evaluate longer-term credit trends and certain alternative credit information when available.
For example, it may consider how your credit card balances have changed over time. Have you been consistently paying down your balances? Have you been relying more heavily on credit cards over the past several months?
These patterns can provide additional information about how you manage your finances.
This does not mean VantageScore automatically gives you a higher credit score. Some borrowers may have a higher VantageScore. Others may have a higher FICO score.
The important thing is that mortgage lenders have another potential way to evaluate eligible borrowers.
Could a different credit score help you qualify?
Potentially.
For eligible conventional mortgage loans, lenders can now use Classic FICO or VantageScore 4.0, subject to applicable agency and lender guidelines.
Let's look at a hypothetical example. You want to buy a home, but your qualifying mortgage credit score falls just below a particular lender's requirement. Maybe you were told you needed to spend the next few months improving your credit before applying again.
That might still be the best strategy. But depending on your loan program and lender, it may now be possible to evaluate whether a different scoring model creates another path forward.
This is especially important for buyers who have been told they are only a few points away from qualifying.
For Realtors: Some of those buyers may be worth revisiting.
Think about how many conversations you have had with potential buyers who were told they needed to work on their credit before they could purchase a home.
A different scoring model is not a guaranteed approval, but it is another opportunity to evaluate a buyer's options before putting their homeownership plans on hold.
Could a different credit score save you money?
Getting approved is only part of the equation. Your credit profile may also influence the cost of your mortgage.
Depending on your loan program, it can affect your interest rate, mortgage insurance, upfront financing costs and available loan options. A different qualifying credit score could potentially move you into a more favorable pricing category.
That means even buyers who already qualify for a mortgage may benefit from exploring their options.
However, a higher credit score does not automatically mean you will receive a lower interest rate or a better loan. Your down payment, property type, debt-to-income ratio, loan amount and other factors also play a role.
That is why I take a strategy-first approach when working with buyers. The goal is not just to find the highest credit score.
The goal is to find the mortgage strategy that makes the most sense for your financial situation.
Can two borrowers each use their best credit score?
Here is where things get a little more interesting.
Suppose you and your spouse or partner are purchasing a home together. One of you has a higher Classic FICO score, while the other has a higher VantageScore. Can you simply choose whichever score is better for each person?
Not necessarily. For applicable conventional loans, the same scoring model must be used for all borrowers on the loan. That means we cannot simply mix and match scoring models to create the best possible combination.
There are also differences in how loan programs and lenders evaluate credit scores for qualification and pricing. This is another reason why looking at your entire financial picture matters more than focusing on a single number.
What about FHA loans?
Conventional lending is not the only area of the mortgage industry experiencing changes. FHA is also expanding its acceptable credit-scoring models to include VantageScore 4.0 and FICO 10T.
The implementation of these additional models is subject to FHA's published timelines and lender availability.
If you are considering an FHA loan and have been told your credit score is close to a qualifying threshold, it is worth speaking with a mortgage advisor about your options. You may have an opportunity to move forward today, or we may be able to develop a strategy that puts you in a stronger position in the coming months.
Either way, you do not have to navigate the process alone.
What should you do if you have been denied a mortgage?
First, understand that being denied by one lender does not necessarily mean you cannot qualify for a mortgage. Different lenders may have different credit requirements, underwriting guidelines and loan programs available.
As a mortgage broker, I have access to a wide range of lending partners and financing options. When I review a loan scenario, I want to understand more than whether a previous lender said yes or no. I want to understand why.
Here are five questions worth exploring if you have previously been denied:
What was your actual qualifying mortgage credit score?
Was your credit score the only reason you did not qualify?
Which loan program and credit-scoring model were used?
Are there alternative loan programs or scoring models available?
Could another lender offer greater flexibility for your situation?
Sometimes the solution is a different lender. Sometimes it is a different loan program. And sometimes the best approach is to create a plan to improve your credit, reduce debt or build your savings before purchasing a home.
The important thing is that you understand your options and have a clear plan moving forward.
For homebuyers: Now may be a good time to revisit your options.
If you have been putting off your plans because of your credit score, your credit profile may have improved. Your financial situation may have changed. And new lending options may be available that were not available when you last applied.
For Realtors: Reconnect with buyers who struggled to qualify.
Rather than assuming those buyers still need to wait, encourage them to have another conversation with a mortgage professional.
One of the things I enjoy most about being a mortgage advisor is helping people find solutions when they have previously been told no. Not every financing challenge can be solved immediately, but understanding the reason behind the challenge allows us to develop a strategy.
What this means now
The mortgage industry continues to evolve. New credit-scoring models are not a shortcut around responsible lending requirements. They are another tool that may help evaluate a borrower's ability to qualify.
For some buyers, the outcome may not change. For others, a different approach could make a meaningful difference in their homebuying journey.
My biggest takeaway is this:
Do not let one credit score or one mortgage denial determine what you believe is possible.
Get educated. Understand your options. Build a strategy.
You might be closer to your homeownership goals than you think.
Let's explore your options
Whether you are buying your first home, looking for a second opinion after being denied or a Realtor who has a client struggling to qualify, I would love to help.
My goal is to educate you on your options and help you build a mortgage strategy that works for your situation, not simply tell you whether you qualify today.
