A credit score is one way for a lender, such as Flanagan State Bank, to determine the likelihood that you will repay your loan. It affects both your ability to qualify for a loan as well as the loan terms (such as interest rate) that are available to you. Historical data gathered by various government agencies such as the U.S. Department of Housing and Urban Development (HUD), Fannie Mae, Freddie Mac, and others show that, in general, consumers with higher credit scores tend to be more likely to pay back their loans. For a lender, this means the higher the credit score, the lower the risk.
As important as credit scores are to consumers’ financial lives, they are confusing to many. For example, we often hear from our customers that their credit score on Credit Karma was higher (or lower) than the credit score the lender obtained for them when they were shopping for a vehicle. This may seem surprising, but actually, it is quite common. Many different credit scores can be accessed, and credit scores change any time activity on your accounts is reported to the credit bureaus.
Credit Score Calculations
Different types of credit reports have different sets of algorithms that are set up to serve the industry using the report. Because of this, the credit report that a car dealership pulls to qualify you for a car loan may be different than the one that a lender obtains for a mortgage loan – meaning the two reports will also have different credit scores.
The mortgage loan industry primarily obtains credit scores from the three major credit bureaus (Equifax, Experian, and Transunion). Of the three scores provided (one from each credit bureau), the lender will use the middle score, as opposed to the highest or lowest score, to determine if an applicant qualifies for a mortgage loan and the rate on that loan.
Minimum qualifying credit scores are set by the agencies that lenders work with as well as the lender itself. For example, at the time of writing this article, the minimum credit score that Flanagan State Bank will accept is 620 for any of our loan products – Conventional, FHA, USDA, and VA.
Loan Level Pricing Adjustments
As previously mentioned, higher scores translate into lower risk for the lender, so in turn, lower scores mean higher risk for the lender. Due to this, lower scores will have LLPA adjustments to compensate for this risk. What does LLPA mean to a borrower? LLPA stands for Loan Level Pricing Adjustment. In other words, this means that the interest rate will be adjusted up for certain risk factors, such as a lower credit score.
These LLPAs are determined by the agencies and passed on to local lenders to include when they are pricing loans to consumers. The higher the credit score, the fewer (if any) LLPAs will be included in that applicant’s rate.
At Flanagan State Bank, we want you to know that you are so much more than a credit score to us. What can you do if you have some “dings” in your credit? Reach out to us for assistance. We have someone on staff to help our customers reach their goals for better credit.
If your credit is good, we still recommend you access your free yearly credit report through www.annualcreditreport.com to make sure your credit report contains no surprises. If it does, you can take steps to remedy the situation before you are in need of any loans.
The Loan Officers at Flanagan State Bank understand that life happens and credit can take hits on occasion. We would be happy to assist you in obtaining the best mortgage possible. If this means helping you with your credit, we would be more than happy to help you figure out what needs to happen to bring your credit scores to a higher point.
We want to be your lender for life!