A borrower’s credit is one of the most important metrics a commercial mortgage lender uses to determine their financial strength, as well as the terms of the mortgage. Because of this, it’s crucial for brokers to understand the significance of credit reports and the differences that may appear between the free credit sites, as well as the three major credit bureaus in order to best prepare themselves and their borrowers.
- Free reports aren’t what lenders are using. While free credit reports are useful to lenders when they’re initially reviewing a deal, these are not the reports they’re going to use once they begin seriously underwriting a commercial mortgage. Lenders are going to pull tri-merge reports, and while your borrower’s score according to a free site might be in the mid-600s, it’s likely to appear lower on a report from any of the major credit bureaus. It’s important to prepare for this and for the terms your borrower will be offered based on this score.
- Different formulas mean different scores. Whether it’s a credit card company, a free website or one of the major bureaus, it’s important for commercial mortgage borrowers and brokers to be aware that these sources all use different formulas to evaluate an individual’s credit score rating. Some reports are based on the FICO scoring model, while others are derived from VantageScore, which was developed by Experian, Equifax and Transunion.
- There’s a variation in credit score ranges. In addition to the differing formulas the bureaus and sites use to compute credit scores, it’s important to keep in mind that score ranges also vary. For example, Equifax scores are between 280 and 850, while Experian’s range from 330 to 880. These are all things your lender will take into account when evaluating your borrower’s credit health.
- Everyone is entitled to a free report from each credit bureau. That’s right, free annual reports from each of the major bureaus are guaranteed, but your borrower needs to request them. Let your borrowers know about this option; they can order online at AnnualCreditReport.com or call 877-322-8228
Because it’s such a crucial piece of the lending puzzle, brokers need to make sure they understand the basic differences between credit reports and how lenders use those reports to underwrite the commercial mortgage deal. While free reports are helpful in some respects, but it’s best to discuss what type of credit report will be most helpful with your lender before submitting a request.