Mortgage Overlays and Other Mortgage Credit Secrets

/Mortgage Overlays and Other Mortgage Credit Secrets

Credit worthinessIf you’re a real estate agent, I’m sure you’ve had a client or two that you thought was a shoo-in for a mortgage at an awesome rate because they shared with you that they had a high credit score. Or maybe you’re looking for a mortgage yourself and you’re excited that your report shows you have awesome credit.

But did you know that the score you see on Credit Karma (based on a consumer credit reports) ISN’T the same one mortgage lenders use when underwriting a loan?

As a lender, I get asked about this all the time. Clients wonder, “Eddie how in the world did my credit score drop 30 points in one day? Yesterday I checked my credit score at CreditKarma and it was a 750…and you are telling me it is a 720????”

For obvious reasons, people find this very annoying, especially when it makes a difference in the mortgage rate they get for their loan!

There are several reasons why this can happen:

Different credit score reporting. Consumer credit reports are the basis of modeling that is used to generate a credit score. The three main consumer credit reporting agencies – Equifax, Experian and TransUnion – provide scores to two different modeling companies. The modeling companies are Fair Isaac, which provides a FICO score, and Vantage. Vantage is a joint venture between the credit reporting agencies and doesn’t charge as much to provide a score, therefore this is the score most of the consumer credit scores provide (especially those free ones!). But mortgage lenders prefer Fair Isaac.

Generic vs. mortgage-specific scoring. Most of those consumer credit reports use a generic equation to derive a score. This equation looks at various factors of your credit history, but it tends to emphasize payment history over other factors. This gives a general sense about overall credit behavior, but mortgage lenders know that mortgage loans and other types of credit are different animals. For one thing, the payments for a mortgage are much higher. Mortgage lenders need more information, so we use a “mortgage overlay” that looks more closely factors like debt utilization to arrive at a mortgage specific score.

Important Note: For instance, if you owe $50,000 on credit cards and you’re making payments on time, a credit card lender might be inclined to give you another card – you’ve met their criteria and at most they’ll only be out a few thousand dollars. But if looks like you’re running up your credit card balances to make ends meet, a mortgage lender would be concerned about that, even if you have previously been good about making payments.


Other factors. There are a number of other factors that can lead to these discrepancies, too. For instance, mortgage lenders look at the middle score between the three agencies, whereas a client usually tells us their highest score. A client might have looked at their score in April but the lender pulls credit in June; things change.

Just the fact of a mortgage lender pulling credit can affect the score, because when a credit report is pulled for a credit application it shows up on the report as a “hard inquiry,” which affects the score. (This is one reason why rate shopping is a bad idea, because every time a lender checks credit, it brings down your score).


What can you do to prevent being surprised by your lender’s credit score? Here are a few tips:

  1. Always try to keep your credit balances as low as possible. Zero balance is best.
  2. Pay off balances, don’t just make payments.
  3. Keep credit inquiries to a minimum within 6 months of applying for a mortgage.
  4. Don’t apply for any type of credit within 6 months to a year of applying for a mortgage.
  5. Look at all three agency scores, rather than your highest score.

I hope this is a helpful explanation about this very common issue. If you know someone who has questions about how lenders score credit, feel free to share this information with them!

2017-05-09T11:38:16+00:00 May 9th, 2017|

About the Author:

A native Phoenician serving Arizona Homeowners with over 14 years lending experience and currently the Vice President and Partner of Signature Home Loans LLC. Eddie has been a mortgage broker since 2003.

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