Credit Score Confusion? This Calculator Breaks it Down

Loan officer handing a pen to the home buyerFannie Mae, the renowned government-sponsored enterprise, has long been a critical player in the American housing market. With its mission to expand homeownership opportunities for all Americans, Fannie Mae consistently seeks innovative solutions to help lenders assess borrowers' creditworthiness.

In their latest endeavor, they have introduced the Credit Score Average Calculator—a game-changing tool designed to provide lenders with a more accurate representation of a borrower's credit history by considering a broader range of factors beyond just the numerical score. By incorporating this cutting-edge technology into their underwriting process, Fannie Mae aims to revolutionize the lending industry and ensure deserving individuals can access affordable mortgage financing.

Understanding Credit Scores and How They're Calculated

Your credit score is a number that reflects your creditworthiness or how likely you are to repay a loan. Credit scores are calculated using complex algorithms considering payment history, credit accounts, credit inquiries, and credit utilization. The most common credit scoring models in the United States are Fannie Mae and conventional loans.

Borrowers need to have specific credit scores to qualify for these loans. Fannie Mae sets median credit score requirements to ensure borrowers meet their eligibility criteria. It's important to note that each credit bureau (TransUnion, Equifax, and Experian) may have slightly different information on file, which can affect your credit score.

What is a Good Credit Score, and Why Does It Matter?

FHA and Fannie Mae loans are popular options for individuals seeking homeownership. Recent changes in Fannie Mae's credit scoring guidelines have made having a qualifying credit score for these types of loans important. The median credit scores for Fannie Mae loans are usually around 700 or above, which is considered good. A higher credit score can help borrowers qualify for a loan with better terms and lower interest rates.

It can also increase their chances of getting approved for rental agreements, job opportunities, and insurance policies. Since everyone's income and financial situation differs, what constitutes a good credit score may vary from person to person. However, aiming for a credit score of 700 or above is generally recommended when considering applying for a loan or mortgage.

Influences on Your Credit Score:

Several factors can impact your FICO score, including your minimum qualifying credit score, credit scoring changes, and the advantages of conventional loans. Conventional loan options and comparing conventional and FHA loans can also affect your credit score. Meeting traditional loan qualifications and requirements, including the possibility of having multiple borrowers or a co-signer, can impact your credit score. Qualifying together for a conventional loan can also be an essential factor to consider.

Ways to Access Your Credit Score at No Cost:

You can evaluate your credit score using various online tools and monitoring services to keep up with the updated credit scoring policy. Many credit card companies offer free credit score tracking, and several websites provide access to your credit report and score without cost. It's essential to regularly check your credit score to ensure that it's accurate and reflects the changes in credit score evaluation.

This is especially crucial to achieve homeownership, buy a home, or refinance your existing home. You can stay on track with your homeownership dreams by monitoring your credit score. If you come across any errors or discrepancies, it's essential to contact the credit bureaus to have them corrected.

Improving Your Credit Score: Tips and Tricks

Improving your credit score takes time and effort, but there are several things you can do to make a positive impact.

First, make sure you're making all of your payments on time. Payment history accounts for 35% of your FICO® score, so even one missed or late compensation can significantly impact.

Next, strive to maintain your credit utilization under 30%.

Third, avoid opening too many new credit accounts simultaneously, which can negatively impact your score. Finally, if you have a high credit card or loan balance, pay it down as quickly as possible.

The Role of Credit Utilization in Your Credit Score

Credit utilization is essential in determining borrowers' creditworthiness when qualifying for a loan or a mortgage. Borrowers' creditworthiness is often determined by their ability to manage their credit and demonstrate responsible borrowing habits. One way lenders assess this is by considering credit utilization, which is the amount of credit used compared to the available credit.

To qualify for a bigger loan or a conventional loan, it is crucial to maintain a low credit utilization, ideally below 30%. Lenders also consider the median FICO Score, which is the qualifying score used to evaluate the creditworthiness of borrowers. FHA loans have their advantages and requirements that borrowers need to meet.

Here's How the New Credit Score Averaging Calculator Works

The Federal National Mortgage Association is now averaging credit scores through its automated underwriting software. Lenders and mechanical underwriting systems used the lowest middle score in past years.

For example:
Borrower 1: Scores: 590, 605, 648 Middle Score: 605

Borrower 2) Scores: 661, 693, 693 Middle Score: 693

Under the previous calculation, the middle score of 605 was used in the underwriting and approval process.
But now, the representative credit score is obtained by averaging the credit scores.

Here's a calculator that will average the credit scores:

For example:
Borrower 1) Scores: 590, 605, 648 Middle Score: 605

Borrower 2) Scores: 661, 693, 693 Middle Score: 693

Under the previous calculation, the middle score of 605 was used in the underwriting/approval process.
But now the representative credit score is obtained by averaging the credit scores.

Here's a calculator that will average the credit scores:

 
  Experian Transunion Equifax Average Score
Borrower 1
Borrower 2
Average Credit Score    
 

Conclusion

Monitoring your credit score and understanding the average credit score range is crucial for managing your finances and achieving your financial goals. Improving your credit score can help you qualify for a mortgage, including FHA loans with minimum down payment requirements and mortgage insurance. These loan programs allow you to limit based on your income and assets, and they are designed to assist borrowers who earn less than 80% of the median income.

By monitoring your credit score and making changes to improve it, you can increase your chances of qualifying for a mortgage loan. It's essential to be aware of any changes in credit scoring guidelines or qualifying criteria, such as the new Fannie Mae guidelines, which may impact your ability to be eligible for a loan or your mortgage insurance requirements. Take control of your credit score today and pave the way for a brighter financial future, whether you seek an FHA loan or any other mortgage loan.

SOURCE:
Fannie Mae Credit Scoring Changes Could Help More Borrowers Qualify
General Requirements for Credit Scores
Requirements for Credit Reports