RETURN TO HOMEI get many great questions on my blog, and love to post the one’s with universally useful answers. On Saturday, I received this email from one of my readers that covered two great areas. 1. why is the FICO score on consumer-pulled credit reports lower than the score actually obtained from mortgage lenders? 2. What is the deal with the Good Faith Estimate and closing costs?
Hello Dale,
Thank you for educating me in my quest to purchase my first home. I did purchase your book: The New Rules for Mortgages and it is very educational. However, there is still some information which I would like to get educated on. As I mentioned above, I’m closely working with a local bank in order to get approved for a loan (to purchase my first home for me and my wife). When I went to the bank for pre-approval process, I was shocked to find out about the credit scores the bank obtained; they were different than my new on-line “fresh” credit scores I obtained via www.annualcreditreport.com from the 3 big companies (Equifax. Experian and Transunion): a gap of 60 to 80 points. I asked the bank to explain the difference between my on-line credit score (showed them the copies) and their scores.
I was told THEY go by their own financial rules/regulations etc. and what their affiliates are able to pull out from the 3 big companies. I spend hours on the internet and on the phone in order to get a hold of a real person from the 3 big companies for further explanations. I was able to reach representatives from all 3 credit report companies (even asked for supervisors due to regular customer representative lack of knowledge or non-English-speaker…which is scary…) and to my stupefaction, I was told that all financial intuitions have their own financial system in place which generates a different score versus the on-line personal one !!!!! I was shocked! With this explanation, I took the liberty to ask them: why do I need their on-line $7.50, $10 and $15 charge credit scores when basically they are not the ones, as they should be reflected when I’m trying to qualify as a first home buyer. I was angry…. I’m very confused and I’m not sure who legally is right and who is wrong anymore. Can you PLEASE guide on this issue? Also, I would like to know more about the good faith estimate which I didn’t find in the book, perhaps I missed it.
Thank you,
John
Dear John,
Thank you for buying my book and I am glad you enjoyed it. With your permission, I would like to post your question on my blog this week with the long answer.
1. It is true that when a consumer pulls their own credit report directly from one of the big three bureau they can get a free copy of the report. However, they do pay for obtaining the credit report. The law provides for a free annual report, not FICO score. Again, it is true that most mortgage lenders get a different score than a consumer-pulled credit score- almost always lower. This is because, the lenders get what is called a tri-merge credit report, which is a combo of all three. It will include much more collaborative information than when pulling an individual report. Also, the lenders’ reports are based on many more weighted factors than a consumer request for their own report/FICO score. This is because there is much more at risk for the lenders, so they might have 20 key factors to calculate a credit score rather an 8. I am making up these numbers, but you get the gist. So, a consumer credit score should be used for informational purposes and to review one’s credit report. A lenders score is actually used to qualify a potential borrower and price out an interest rate. This comes as a surprise to many, but this is the reason.
2. Good Faith Estimates (GFE) are the breakdown of closing expenses a borrower will pay at the closing. Previous to January 1, 2010 it was simply that: an estimate provided by the lender in good faith. Now, it must include exact figures in advance, many of which cannot change by a penny to 10% depending on the tolerance level. The form, once 1 page is now 3, much more details and of course complicated.
It is so complicated, that industry people, including myself, have taken many hours of webinars and seminars on how to calculate and complete the form. So, I wonder if it took me about 20 hours to figure it out, how can the average consumer who does not have the experience work through the figures? The only thing I can tell you on this is ask for the GFE upfront and make the loan officer go through the numbers with you line by line. It is supposed to reduce borrowers being squeezed and ripped off at the last minute, and it does. It also makes shopping for a loan and locking in an interest rate a bit harder for the consumer. We shall see. Oh, and we covered the closing costs in pages 141-145 in the book!
So, I hope this helps.
Dale Robyn Siegel