What Credit Score Do Banks Use for Home Loans?

Credit scores play a significant role in the home loan process, serving as a primary tool for banks to assess a borrower’s financial reliability. A strong credit score signals to lenders that an applicant is likely to manage their mortgage responsibilities effectively, potentially leading to more favorable loan terms. Conversely, a lower score may indicate a higher risk, influencing both loan eligibility and the associated costs.

Credit Scoring Models for Home Loans

When evaluating mortgage applications, banks primarily rely on specific versions of FICO scores, which are the industry standard for home lending. Lenders typically use FICO Score 2 from Experian, FICO Score 4 from TransUnion, and FICO Score 5 from Equifax. These particular FICO models are favored because they are older, established versions designed for long-term debt assessment.

Mortgage lenders commonly obtain a “tri-merge” credit report, which compiles information from all three major credit bureaus. They then typically consider the middle score among the three FICO scores reported for qualification purposes. While VantageScore is another credit scoring model, it is generally not the primary score used for final mortgage approval by most major lenders, although some may use it for pre-qualification or other credit products. The Federal Housing Finance Agency (FHFA) recently announced changes that will allow Fannie Mae and Freddie Mac to accept VantageScore 4.0 in addition to FICO Score 10T, with a transition period expected to begin in late 2025.

Typical Minimum Scores by Loan Type

Minimum credit score requirements vary depending on the type of home loan being sought. Conventional loans, which are not government-backed, typically require a credit score of 620 or higher. Borrowers with scores of 740 or above often receive the most competitive interest rates.

FHA loans, insured by the Federal Housing Administration, offer more flexible credit requirements. A credit score as low as 580 may qualify a borrower for a loan with a 3.5% down payment, while a score of 500 might be accepted with a 10% down payment. However, many FHA-approved lenders often impose their own minimum score requirements, frequently around 620.

For VA loans, backed by the Department of Veterans Affairs, there is no federally mandated minimum credit score. Despite this, most lenders typically require a minimum score of around 620. USDA loans, which support homeownership in eligible rural areas, also lack a strict federal minimum. However, many lenders look for scores around 640, as this often allows for automatic approval through the USDA’s Guaranteed Underwriting System (GUS).

How Your Score Influences Loan Terms

A credit score significantly impacts the terms of a home loan beyond just initial approval. A higher credit score generally leads to a lower interest rate, which can result in substantial savings over the loan’s lifetime.

Loan approval itself hinges on meeting certain credit thresholds, as a score below a lender’s minimum can lead to denial. Lower credit scores may also necessitate a larger down payment or limit the maximum loan amount a borrower can receive. For conventional loans with less than a 20% down payment, private mortgage insurance (PMI) is typically required, and a lower credit score can result in higher PMI premiums. A stronger credit profile can also lead to more favorable overall loan terms, indirectly affecting the total cost of obtaining a mortgage.

Key Factors in Mortgage Credit Scores

FICO scores, including those used for mortgages, are calculated based on several components of a borrower’s credit history. Payment history is the most influential factor, accounting for approximately 35% of the score. Consistently making on-time payments demonstrates financial responsibility and is crucial for maintaining a healthy score.

Amounts owed, particularly credit utilization (ideally below 30%), make up about 30% of the score. The length of credit history contributes about 15% to the score, with longer histories often viewed more favorably. New credit, reflecting recent applications and newly opened accounts, accounts for approximately 10%. Finally, the credit mix, or the variety of credit types such as installment loans and revolving credit, makes up the remaining 10%.

Finding Your Mortgage Credit Scores

Consumers are entitled to a free copy of their credit report from each of the three major credit bureaus annually through AnnualCreditReport.com. These reports provide detailed information on credit history but do not always include specific FICO scores. While many online services offer “free credit scores,” these are often educational scores, like VantageScore, and may not be the exact FICO mortgage scores (FICO 2, 4, or 5) that lenders utilize.

To access the specific FICO mortgage scores, consumers may need to inquire with potential mortgage lenders during pre-qualification or consider subscribing to a dedicated credit monitoring service that provides these versions. MyFICO.com also offers access to various FICO scores, though this typically involves a fee. It is advisable to check credit scores well in advance of applying for a home loan, allowing time to address any inaccuracies or improve credit habits if necessary.