How Your Credit Score Actually Gets Used When You Buy a Home

Somebody sits down with me, pulls out their phone, and shows me a credit score from an app. They are usually proud of that number, and often they should be. Then we pull the report we actually use for the loan, and there are three scores on it. None of them matches the phone. And the one we are going to use is not the highest of the three.

That is not a trick, and it is usually not bad news. It is simply how mortgage credit works. But almost nobody explains it to a buyer until the moment it matters, and by then the buyer has already built a whole plan around the wrong number.

It's been my experience that this one gap costs people more than they realize. It costs them time, it costs them a little negotiating position, and once in a while it costs them a house they wanted, because they walked in believing they qualified for something they didn't.

So let's go through it properly: which score a lender uses, where it comes from, and what it actually controls.

The score on your phone is not the score on your loan

When you check your credit on your own, through a card issuer or a free app or a subscription service, you are almost always looking at one bureau. Maybe TransUnion. Maybe Equifax. Maybe Experian. One.

When you buy a house, your lender pulls what's called a tri-merged credit report. That's a single report that pulls your file from all three of the major bureaus at once and lays them side by side, each with its own score.

Those three scores are rarely identical, and there's a mundane reason for it. Not every creditor reports to all three bureaus, and the ones that do don't all report on the same day. So each bureau is holding a slightly different picture of you, and a slightly different picture produces a slightly different score.

Here's a detail most people have backwards. The bureaus don't generate your score. TransUnion, Equifax and Experian hold the credit data. The score itself is a FICO score, produced by running a scoring model against whatever data that particular bureau is holding. Three sets of data, one scoring model, three results.

They don't average the three. They drop two of them.

This is the misconception I correct more than any other, and I want to be plain about it.

A lender does not add your three scores together and divide by three. There is no average. What they do is take the highest score and the lowest score and set both of them aside. The middle score is the one that goes to work.

For one buyer that middle score comes from Experian. For the next it comes from TransUnion. There's no pattern to it, and it doesn't much matter which bureau it came from. What matters is that it's the one in the middle.

So if you're going to carry one number around in your head while you get ready to buy, carry that one. Not your best one. The middle one.

What that middle score actually controls

Three things, generally speaking.

• Which loan program fits you. Conventional financing, an FHA loan, a high-balance loan for higher-priced properties in counties where the loan limits allow for it, or a jumbo loan above those limits. Each of those has different credit expectations, and your middle score is a large part of which door is open.
• What interest rate you may qualify for. Generally speaking, stronger credit is associated with better terms. I can't tell you what any particular buyer will be offered, because rates move and every file is its own animal.
• What that rate costs you. This one nobody expects. Loan pricing is tiered by credit, which means two buyers can be quoted the same rate and not pay the same thing to get it. The rate and the cost of the rate are two separate questions, and your middle score sits inside both of them.

The general landscape, and please read the hedges

Here's the general shape of the market, with a caution attached: this is context, not a prediction about you. Nobody can look at a number on a screen and tell you what you'll be approved for. That's what an actual application is for.

The FICO scale runs from 300 to 850. In 36 years I have never seen a score sitting at either end of it.

Generally speaking, most lenders want to see a middle score above 580. There are programs and situations that go below that number, but above 580 is where the conversation usually gets easier.

From there it's a gradient, not a staircase. The higher the middle score, the better the terms tend to be. In my experience, once a middle score is above 720, most loan products are generally available to that buyer. That's a general observation about how the market behaves, not a promise about your file.

And if your score is lower than you'd like: that's a starting point, not a verdict. Scores move. I've watched plenty of people correct a reporting error or pay down a couple of balances and be in a different position a few months later.

Your score is one half of it. Your debt ratio is the other.

Credit gets all the attention, but no underwriter looks at a score by itself. They look at what you earn against what you already owe.

The arithmetic is not complicated. A lender adds up every minimum monthly payment showing on your credit report: car payments, student loans, credit card minimums, installment loans, along with the housing payment you're proposing to take on. That total gets divided by your gross monthly income, meaning your income before taxes come out. The result is your debt-to-income ratio.

It's been my experience that underwriters generally don't like to go much above the mid-40s, somewhere in the neighborhood of 47 percent. I want to be careful with that number. It's a general observation from a long time doing this, not a line anybody can be held to, and it moves by program and by file.

Files do go higher. When they do, it's usually because something else is carrying weight. In this business we call those compensating factors. The ones I see most often:

• Meaningful reserves. Money still in the bank after the down payment and closing costs are handled.
• A light debt load, where the new housing payment is essentially the whole ratio and there isn't much else on the report.
• A clean payment history over a long stretch, someone who hasn't been running balances up.

In the end, though, the automated underwriting decision usually settles the question. On conventional financing, your full file can be run through Fannie Mae's automated underwriting system, and what you're looking for is an approve/eligible finding on the Fannie Mae Desktop Underwriter (DU) certificate. That's a far better answer than anybody's mental arithmetic, including mine.

One caveat I give every buyer, and I'd rather be the one to say it out loud: DU findings are not a final loan approval. A DU certificate is a strong, specific signal about your file. Final approval still comes from an underwriter reviewing your actual documents. Anybody who tells you otherwise is selling you a comfort they can't back up.

If you're going FHA or VA, the house gets graded too

This part catches people, and it isn't really about your credit at all. I'm putting it here because it's the other half of the same conversation.

FHA is generally more forgiving than conventional financing on credit scores and on debt ratios. That's the side of the trade most buyers know about. The side they don't know about is that FHA and VA are considerably stricter about the condition of the property itself.

On an FHA or VA appraisal, generally speaking, the appraiser is evaluating the house, not only its value. Items I see noted:

• A water heater that isn't strapped
• Peeling paint
• No working heat source in the home
• A composition shingle roof that's deteriorated, with shingles curling, lifting or missing

A conventional appraisal generally doesn't scrutinize those items the same way. Same house, same buyer, different loan type, and a different level of attention to condition.

Here's why that's practical rather than academic. Write an offer on a house with two or three of those issues while you're using FHA financing, and you've now got a repair conversation to have in the middle of escrow, with a clock running and a seller who may or may not be willing. Repairs are as negotiable as any other term in a purchase contract, but it is a far easier negotiation to have before you're in contract than after.

This is one of the concrete reasons to have an experienced agent walking properties with you. A good agent looks at a roof and a water heater with your loan type already in mind, and says something before you write the offer instead of after.