When there are multiple clients qualifying to buy or refinance a home, Fannie Mae will average the median credit scores of all borrowers starting this week. This is a change from past policy where they looked at the lowest median credit score of all clients on the loan. If you remember fifth-grade math, you’re probably thinking to yourself, “The average and the median are two different things.” You would be right, so let’s break down what’s happening here a little further.
When you qualify for a mortgage or any loan, lenders pull your credit score. However, it’s important to know that you actually have three different scores because there are three different credit bureaus – Equifax®, Experian™ and TransUnion®.
You’re likely to have a slightly different credit score from each of these three sources for two reasons: First, there’s a chance that each bureau doesn’t have everything there is to know about your credit record. There may be things that appear on your report with one bureau that don’t appear on the others.
Second, each bureau uses a slightly different version of the FICO® Score for their evaluations. Because factors can be weighted differently, your score is likely different at each bureau even if all the information reported is the same.
The way that lenders handle this with individuals applying for loans is to take the median, or middle, credit score of the three as the qualifying one when they apply for loans. In the past, if two borrowers applied for a loan, the lowest median credit score was used to qualify.
When two or more people are on a loan, Fannie Mae is going to average the median credit scores of two individuals. Because Fannie Mae has a minimum qualifying credit score of 620, this should help more clients qualify together on the loan, allowing for the use of all incomes to determine what they can afford.
This also helps clients who are still working on their credit but may be applying with a co-signer. Averaging the two scores may give them the ability to get a mortgage where they wouldn’t have been able to before.
To give you an idea of how this works, let’s do an example.
