How do mortgage companies average the score on all 3 credit reports?

Written by colleen o'brien
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How do mortgage companies average the score on all 3 credit reports?
Mortgage companies use credit reports to assess credit risk. (Comstock Images/Comstock/Getty Images)

When you apply for a home loan, the lender pulls up your credit score to help determine your ability to repay the debt. Three credit bureaus, Experian, Equifax and TransUnion, supply the scores. Each agency analyses your debt obligations and condenses the information into a three-digit number, which is your credit score. This number represents your credit risk at a certain period of time.

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The Median

Most lenders simply use the middle score of the three. For example, if a borrower has a score of 753 from Experian, 729 from Equifax and 717 from TransUnion, the lender chooses the middle number, or 729. In the case of two or more borrowers, the lender may choose to use the number of the borrower with the lowest middle score. If a borrower only has two credit scores, which sometimes happens when a person doesn't have a considerable credit history, the lender will use the lower of the two scores.

Why Use Three Bureaus?

Not all credit bureaus are alike. Each bureau collects credit information from different creditors and has its own way of analysing the data, which is why the same borrower may have three different credit scores. Some bureaus only report information from specific creditors while other bureaus calculate credit histories over a longer period of time. A lender is able to obtain the most thorough and accurate financial picture by reviewing all three credit reports.

Which Score to Use

Lenders use the middle credit score to evaluate each borrower so that the borrower's credit risk is neither understated nor overstated. According to TransUnion, credit scores can range by as much as 40 points. This means that one bureau may report an average credit score while another may report one that's well above average for the same borrower.

The Importance of Credit Scores

An excellent credit score affords borrowers access to better loan terms, lower interest rates and lower associated fees. Using the middle score of the numbers supplied by all three bureaus can help compensate for a lower score from one agency, particularly if the other two scores are significantly higher.

Compensating Factors

High credit scores hold significant weight when it comes to obtaining a loan with favourable terms. Lenders also look for other factors such as a large down payment, stable income and minimal debt. These things can help compensate for a lower credit score, particularly if there are two borrowers and one has a considerably higher middle score.

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