What's the average credit score for mortgages that close? Well, in August 2016, it was a FICO score of 731. And it had been inching up all of that year, having started in January at 719. Does this mean those with lesser credit are being locked out of the mortgage market? Not at all. But it does remind us of just how important credit is to mortgage lenders.
A Wide Spread of Scores
Those numbers came from Ellie Mae's Origination Insight Report for August 2016, and if you drill down into the data that provides you'll find a wide spread of credit scores among those who closed their home purchases that month. It's true only 1.06 percent of all those who closed on an FHA loan and 0.18 percent of those closing on conventional loans had FICO scores in the 500-549 range, but ... But read that again! Seriously, statistically significant numbers of people are closing with scores in the lower 500s, though most or all of those will be refinances.
That's not to say we're back to the bad old days of 2006 when the ability to mist a mirror was often the sole qualification needed to get a mortgage approved. And if you have serious defaults on your credit report or recent skipped payments on any of your accounts, you're likely to face years of making on-time payments and keeping your card balances low before your application is taken seriously. But it does mean you shouldn't necessarily assume you're locked out from getting a loan based solely on your score.
Lenders Look at the Bigger Picture
Lenders' practices vary widely when it comes to assessing borrowers' creditworthiness. Some still stick to simply looking at a consumer's credit score and glancing through the credit report on which that's based. But others are increasingly looking beyond those at other information.
That could especially benefit consumers with so-called "thin files," which means they have a limited credit history, either because they are young or because they prefer not to borrow. Thin files almost always mean low credit scores, because you can't measure what doesn't exist, and that can unfairly exclude people who have never been late paying a bill in their lives. One of the reasons so many people who never borrow and always zero their monthly balances still get credit cards is so they can build their credit.
However, lenders trawling more widely for information can also have a bad effect on some consumers. In September 2016, Fannie Mae CEO Timothy Mayopoulos told Forbes that as well as normal credit scores, his company uses "trended data," which it defines as "An enhanced credit report with new, valuable data fields, including Actual Payment Amount, and up to 30 months of detailed account history for each trade line." In other words, its IT systems are going to trawl through your finances going back two-and-a-half years to uncover much more detail than a score would reveal. And that could see a mortgage application from a borrower with a lower credit score but who'd zeroed their credit card balances every month get approved, while someone with a higher score but a habit of carrying forward balances could be turned down.
The Limits of Credit Scores
You may think this trended data removes some of the certainty from your application, and you'd be right. But credit scores have never provided the level of certainty some assume they do. Most consumers have at least 20 scores each, and each lender to which you apply may use a different one. All these scores arise because there are two major scoring systems from FICO and Vantage, as well as some more minor ones. Then there are three major credit bureaus (Equifax, Experian and TransUnion), each of which tweaks the FICO and Vantage systems. So there are six scores you're almost bound to have. The others arise because not all lenders update their IT systems with every new generation of scoring system and tweak. So few will have migrated to the recently introduced FICO v.9, and some may still be using version 5, according to that Forbes article. In other words, it doesn't matter how recently you checked your credit score, the one being viewed by a particular lender may be different.
Does that mean there's no point in using a free credit score monitoring service, such as the one offered by LendingTree? Certainly not! It may not tell you precisely the number your lender will see, but it gives you a good idea. And improvements you make to one of your credit scores is likely to be reflected across them all. So, for example, one version may penalize you a little more or less than another for having credit card balances that exceed 30 percent of your credit limits, but they're all likely to give you a higher score the lower you get that percentage, which is called your "credit utilization ratio." You may never know all your credit scores, but knowing one is extremely helpful.
Credit Scores Critical to Mortgage Rates
You may not care about the average credit score for mortgages, but you should certainly be concerned about your own. FICO reckons that, on October 4 2016, someone with a score in the 760-850 range could (as a nationwide average) have got a rate of 3.087 percent on a 30-year fixed-rate mortgage. On the same day for the same mortgage, someone with a score of 620-639 would on average have got a rate of 4.676 percent. On a $200,000 mortgage, the first borrower would have had monthly payments of $853, and have paid $106,944 in interest over the lifetime of the loan. The second borrower, with less good credit, would have paid $1,034 monthly and had a total interest bill of $172,381. That's a $65,437 penalty over 30 years! Obviously, the figures will have changed since that example held good, and you should check today's mortgage rates, and use mortgage calculators to model the current situation.
All this is important because if you apply to a mortgage lender that uses a version of your score that disadvantages you, you could end up paying more in interest than you need to. That's especially true if you're on the cusp of one band of scores, and moving up just a couple of points would move you into another band that entitles you to a lower rate.
Of course, you can't tell in advance which scoring systems and versions any particular lender uses. But, if you get quotes from multiple lenders, you're more likely to find one that assigns you a better score. And that might save you serious money.