What Credit Bureaus Do Mortgage Lenders Use?

When seeking a mortgage, understanding how lenders evaluate financial reliability is important. Mortgage lenders rely on comprehensive credit information to assess a borrower’s capacity to manage debt and make timely payments. This evaluation forms the foundation for loan approval, interest rates, and overall mortgage terms. It involves examining an applicant’s credit history, which provides insights into past financial behavior and future repayment likelihood.

The Major Credit Bureaus

Mortgage lenders obtain credit reports from the three major credit bureaus: Experian, Equifax, and TransUnion. These bureaus collect and maintain extensive consumer credit data, acting as central repositories for financial information. Each bureau compiles its own version of a credit report, detailing an individual’s borrowing and repayment activities.

Lenders pull reports from all three bureaus to gain a comprehensive view of an applicant’s financial standing. Information can vary slightly between these reports because creditors may report to one, two, or all three bureaus, leading to minor discrepancies. Reviewing all three helps lenders identify inconsistencies or missing information, ensuring a complete and accurate assessment of creditworthiness and supporting informed decisions on mortgage applications.

How Lenders Use Credit Information

Mortgage lenders examine specific elements within credit reports and interpret credit scores to determine eligibility and loan terms. The credit report details an individual’s financial history, providing insight into their past and current credit obligations. Lenders scrutinize this information to assess a borrower’s financial habits and predict future payment behavior.

Credit Report Components

A credit report contains several components mortgage lenders review.
Payment history indicates whether bills are paid on time. Late or missed payments negatively impact a borrower’s standing.
Amounts owed, particularly the credit utilization ratio (credit used compared to available credit), are important. Lower utilization is viewed more favorably.
Length of credit history reflects how long accounts have been open, demonstrating experience managing credit.
Types of credit used, such as a mix of revolving accounts (like credit cards) and installment loans (like car loans), indicate responsible credit management.
New credit inquiries, which occur when a lender pulls a credit report for a new application, are noted. Numerous recent inquiries can suggest increased risk.
Public records, including bankruptcies or foreclosures, are also part of the report and are examined due to their financial implications.

Credit Scoring Models

Credit scores are three-digit numbers ranging from 300 to 850, derived from credit reports to summarize credit risk. Over 90% of lenders use FICO Scores in their lending decisions. Mortgage lenders predominantly use specific older versions: FICO Score 2 (Experian), FICO Score 4 (TransUnion), and FICO Score 5 (Equifax). These models weigh different aspects of a credit report, with payment history and amounts owed being particularly influential.

Lenders receive a “tri-merge” credit report that includes all three of these FICO scores. When evaluating a single applicant, lenders use the middle score of the three obtained. For example, if scores are 720, 740, and 760, the 740 score is used. If there are multiple applicants, such as co-borrowers, lenders consider the lower of the two middle scores from each applicant.

Lender Evaluation

Lenders use these reports and scores to assess the risk associated with a mortgage loan. A higher credit score indicates lower risk, which can lead to more favorable loan terms and interest rates. Conversely, a lower score may result in higher interest rates or loan denial. Beyond the scores, lenders also evaluate income stability, debt-to-income ratio, and available assets to ensure a borrower’s financial capacity to repay the mortgage.

Preparing Your Credit for a Mortgage Application

Taking proactive steps to manage and improve your credit profile can significantly enhance your mortgage application. This preparation can help secure more favorable loan terms and increase the likelihood of approval.

Free Credit Reports

Individuals can obtain a free copy of their credit report from each of the three major credit bureaus—Experian, Equifax, and TransUnion—once every 12 months through AnnualCreditReport.com. This centralized website is mandated by federal law to provide these free reports. While these reports detail credit history, they do not include credit scores, which may need to be obtained separately, sometimes for a fee, or through credit card companies or banks.

Reviewing for Accuracy

Upon receiving credit reports, review them thoroughly for accuracy. Errors can include incorrect personal information, accounts that do not belong to you, or inaccurate payment statuses. Identifying and addressing any discrepancies can prevent potential issues during the mortgage application process.

Disputing Errors

If errors are found, dispute them with the credit bureaus. The dispute process involves submitting a written explanation of the inaccuracy, along with copies of any supporting documentation, to the relevant credit bureau. Send disputes by certified mail with a return receipt to confirm delivery. Credit bureaus are required to investigate disputes within 30 days.

Improving Credit Scores

Strategies can help improve credit scores for mortgage qualification.
Consistently pay all bills on time, as payment history is a significant factor.
Reduce outstanding debt, particularly on revolving accounts like credit cards, to lower the credit utilization ratio.
Avoid new credit applications in the months leading up to a mortgage application, as new inquiries can temporarily lower scores.
Keep older accounts open, even if paid off, to contribute positively to the length of credit history.

Monitoring Credit

Regularly monitoring credit reports and scores is a prudent practice. This allows individuals to stay informed about their financial standing and quickly identify any new inaccuracies or suspicious activity. Consistent monitoring helps maintain a healthy credit profile, beneficial for mortgage applications and overall financial well-being.