One of the most common conversations I have with potential borrowers is about Credit Karma scores and how they may compare with the credit scores that most mortgage lenders will use. It is shocking to borrowers to find out that the scores they have been following and tracking diligently may not be accurate at all when it comes to buying a home. The scoring systems used by mortgage lenders and the scoring system used by CreditKarma are not the same.
The two major differences between Credit Karma scores and lender-accessed scores:
- The scoring system
- The number of credit bureaus requested
The Scoring System:
Mortgage lenders use FICO scores to determine creditworthiness, while
CreditKarma uses a VantageScore to calculate your credit score. I think most of the confusion surrounding credit scores comes from this fact alone.
What is a FICO Score?
FICO scores were developed in the 1950s by Fair Isaac and Company, but they weren’t really used by mainstream lending until the 1990s. A FICO score is a number that represents a borrower’s overall likelihood to pay their bills on time. The idea is that the higher your score is, the less likely you are to default on your debt. FICO scores are used in the vast majority of lending decisions made today, including nearly all mortgage lending.
FICO retrieves information from the 3 credit bureaus and then uses its own system to analyze how creditworthy a person is based on that information. The system’s algorithm (how it determines a score) has changed over the years. FICO has published the weight of certain factors in their scoring model, but the exact specifics of how it is calculated are not publicly available.
What is a VantageScore?
VantageScore was developed by the credit bureaus as a competitor to FICO. VantageScore has the same goal as FICO scores do – to determine a borrower’s potential creditworthiness. However, since it weighs things differently, the scores could be very similar or they could be drastically different.
What kind of a difference between scores can I expect?
This is a tough one to answer since no two borrowers are the same. I have seen Credit Karma scores as many as 80 points different than the FICO scores I’ve pulled for the same borrower (for better or worse). My personal experience is that the difference is typically around 20 points plus or minus.
The Number of Credit Bureaus Requested:
There are three major credit bureaus currently, Experian, Equifax
Credit Karma only pulls in information from Equifax and Transunion, meaning there is no middle score to use as a representative score. When I ask a borrower what their Credit Karma score showed, they will invariably tell me the higher number of the two. This can lead to significant differences in the perception of your “score” with Credit Karma and the one we use to make mortgage lending decisions.
All three bureaus receive information from creditors about your payment history, balance, available credit line, highest balance, minimum payment due and months left to pay. But they don’t always receive the same information! This is why it is important to throw out the highest and lowest scores because they may be anomalies.
Get ready for a FICO curve-ball.
Even within the FICO scoring system, there are several different models. Most mortgage lenders currently use FICO 5 for Equifax, FICO 2 for Experian and FICO 4 Transunion. L
This is different than when you pull the report on yourself (usually FICO 8), when an auto lender pulls it (widely varies, mostly FICO Auto Score 8) or when a credit card company pulls it (also widely varies, mostly FICO Bankcard 8).
So, even when you gather your FICO score from other sources and self-report them to your lender, you may see a significant change depending on which system and model you are using for a comparison. Unfortunately for the consumer, the only way to determine the actual score a mortgage lender will use is to have that lender pull your credit. Luckily, this doesn’t have as much impact you have been lead to believe (more on that from the CFPB here).
One myth I would love to dispel!
Some consumers believe lenders artificially lower credit scores so they can charge higher rates. This is simply not true and not even possible. Lenders request information directly from the credit bureaus along with a credit score from FICO. Lenders have no control over the information contained in a credit report, nor can they change or choose a different score for their own benefit. As a borrower, you receive a credit score disclosure that shows you the
The purpose of analyzing credit scores is to help make a smart lending decision and determine what level of risk a borrower poses. Every lender would tell you that they would love to have only borrowers with high credit scores since they pose the lowest risk of defaulting on their payments (another myth, by the way, the bank doesn’t want to own your home, they want you to pay interest).