What Credit Score Do Mortgage Companies Use?

A credit score numerically evaluates an individual’s creditworthiness, serving as an important indicator for lenders. When applying for a mortgage, these scores are a primary tool lenders use to assess the risk associated with extending a loan. A higher credit score generally suggests a lower risk to the lender, which can lead to more favorable loan terms, including lower interest rates and better approval odds.

The Core Credit Scoring Models Used by Mortgage Lenders

Mortgage lenders primarily rely on FICO (Fair Isaac Corporation) scores to evaluate an applicant’s credit risk. They often use older, industry-specific FICO versions rather than newer models or consumer-facing scores. This practice ensures consistency and aligns with requirements set by major mortgage investors like Fannie Mae and Freddie Mac.

To obtain a comprehensive view of an applicant’s credit history, mortgage lenders typically request a “tri-merge” credit report. This report combines credit data and scores from all three major credit bureaus: Experian, Equifax, and TransUnion. The use of a tri-merge report is crucial because information can vary between bureaus, providing lenders with a complete and accurate picture.

The specific FICO versions commonly used for mortgages are FICO Score 2 from Experian, FICO Score 4 from TransUnion, and FICO Score 5 from Equifax. These models weigh variables differently to assess creditworthiness. When evaluating an application, lenders typically consider all three scores and often use the middle score for their lending decisions. If applying with a co-borrower, the lowest median score between the two applicants is used.

Understanding Your Mortgage Credit Scores

Credit scores used for mortgages are calculated based on several factors, each carrying a different weight in the FICO scoring model. Payment history is the most impactful factor, accounting for approximately 35% of the score. This reflects an individual’s consistency in paying bills on time, with late payments having a significant negative impact.

The amount owed, also known as credit utilization, makes up about 30% of the FICO score. This measures the percentage of available revolving credit being used, with a lower utilization rate (ideally below 30%) indicating responsible credit management. The length of credit history contributes around 15% to the score, rewarding longer-established accounts.

New credit, including recent applications and opened accounts, accounts for about 10% of the score. A sudden increase in new credit inquiries can signal higher risk to lenders. Finally, credit mix, or the variety of credit types managed (e.g., credit cards and installment loans), contributes another 10%. Demonstrating responsible management across different credit products can be beneficial.

Credit scores directly influence mortgage terms. For conventional loans, a minimum score of 620 is often required, though a score of 740 or higher can secure the most favorable interest rates. Government-backed loans, such as FHA loans, may have lower minimum score requirements, sometimes as low as 500 with a 10% down payment, or 580 with a 3.5% down payment. A higher credit score generally leads to a lower interest rate, potentially saving thousands of dollars over the loan’s life.

Improving Your Credit for a Mortgage

Improving your credit for a mortgage application requires consistent effort and strategic financial management. The most impactful action is to pay all bills on time, as payment history carries the most weight in credit scoring models. Setting up automatic payments can help ensure no due dates are missed.

Reducing credit card balances and maintaining a low credit utilization ratio is another effective strategy. Aim to keep your total outstanding revolving credit below 30% of your available credit, ideally closer to 10%, to positively influence your score. Paying down high balances, especially on credit cards, can significantly boost your score.

Avoid opening new credit accounts, such as new credit cards or loans, in the months leading up to a mortgage application. New accounts can temporarily lower your score by decreasing the average age of your accounts and generating hard inquiries. Similarly, avoid closing old, established credit accounts, even if unused, as this can reduce your total available credit and negatively impact your credit utilization ratio.

Regularly checking your credit reports for errors and disputing any inaccuracies is important, as mistakes can negatively affect your score. While hard inquiries from mortgage applications are generally grouped and have a minimal impact if done within a short shopping period (typically 14 to 45 days), other hard inquiries for new credit should be limited. For individuals with limited credit history, secured credit cards or credit-builder loans can help establish a positive payment record. These tools require a deposit or funds held by the lender but report payment activity to credit bureaus, aiding in score development.