Why Mortgage Lenders Pull All Three of Your Credit Reports

Have you checked the mortgage interest rates lately?

If you’ve got excellent credit you can get mortgage loans with interest rates near or below 3.5%, assuming your income and collateral are also in good shape.

Add that to a still recovering real estate market and now might be the time to pull the trigger on a home loan.

The Mortgage Loan Application Process is Unique

First off, borrowing money to buy a house will likely represent the largest financial liability you’ll ever have.

Second, managing a mortgage is unlike the management of any of type of loan due to property taxes, insurance, and impounds.

Finally, unlike a credit card, auto loan, or any other type of credit application process, the mortgage loan application process is unique.

Normally when you apply for a credit card or auto loan, the lender will pull one of your credit reports accompanied by one of your credit scores. They’ll then use that information as a basis for their decision about your application.

They almost never attempt to pull your other two credit reports and scores.

Mortgage lenders, however, almost always pull all three of your credit reports and your three credit scores as part of their standard loan application process.

And, if you are applying with another person, the mortgage lender will pull all three of their credit reports and credit scores as well.

This unique process yields a great deal of information. The aggregate leaves the lender with six credit reports and six credit scores.

Normally, the mortgage lender will “use” the middle numeric scores as to base their decision. That might solve the credit score issue, but it doesn’t solve the credit report issue.

Six credit reports, especially belonging to older applicants, can be overwhelming.

What is a Residential Mortgage Credit Report?

Normally a non-mortgage lender will simply go directly to a credit bureau and pull a report. But, in the mortgage world there’s an intermediary party referred to as a mortgage reporting company.

These companies pull the applicant’s credit reports on behalf of the lender/mortgage broker and then consolidate the information into one easy to read file.

This report is called an “RMCR” or Residential Mortgage Credit Report.  They are also informally referred to as “Tri-merges.”

The information is merged, but more often it is done cosmetically, meaning your credit reports don’t really magically become combined with that of your co-applicant. Tri-merges are very easy to read as the mortgage reporting company will reorganize the information.

All of the scores go in one section. All of the positive information goes in one section– and yes all of the bad information goes in one section too.

Why Do Mortgage Lenders Need All Three Credit Reports?

There’s actually a very good reason mortgage lenders pull all three of your credit reports. First off, because of the amount of money being lent, the lender or funding source (Fannie Mae or Freddie Mac) requires that no credit stone be left unturned.

Credit reports, while considerably redundant, are rarely identical across the three credit reporting agencies. Pulling three reports all but guarantees the lender will see all of your financial liabilities, while pulling just one does not.

Additionally, you won’t have three identical credit scores.  Pulling all three of your scores (or all six if you have a co-applicant) is a conservative approach to risk assessment.

It gives the lender a choice to base their decision on the applicant’s highest score, lowest score, or middle score. The middle score approach has been around for roughly 15 years, give or take.

How the Additional Inquiries Affect Your Credit

Don’t worry about the inquiry times three.  Mortgage inquiries are among the least problematic to your scores and are considerably discounted by FICO’s scoring system.

In fact, the first 30 days on your credit file mortgage inquiries are ignored. That gives you the ability to shop around for the best rate without being worried about any negative score impact.

Happy house hunting!

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.