What Credit Score Do Mortgage Companies Use?

Credit scores play a significant role in an individual’s financial life, particularly when pursuing substantial financial commitments. These three-digit numbers provide a snapshot of a borrower’s creditworthiness. For anyone considering a home purchase, understanding how these scores function is a foundational step in the mortgage application process. Lenders rely on these scores to assess the risk associated with extending credit.

Credit Scoring Models Utilized by Mortgage Lenders

Mortgage lenders primarily use specific versions of FICO scores to evaluate loan applicants. Unlike general consumer scores, mortgage lenders pull older, industry-specific FICO models. These include FICO Score 2 from Experian, FICO Score 4 from TransUnion, and FICO Score 5 from Equifax. This preference for older models is largely because government-sponsored enterprises like Fannie Mae and Freddie Mac, which purchase most mortgages, have historically required their use.

Lenders obtain a “tri-merge” report, compiling credit data and scores from all three major credit bureaus. For a single applicant, lenders use the middle FICO score. For joint applications, the lower of the two middle scores is considered. Alternative scoring models like VantageScore exist, but their use in mortgage lending is limited compared to FICO.

Key Components of a Mortgage Credit Score

A FICO credit score is derived from categories of information within a credit report, each with a specific weight. Payment history is the most influential factor, accounting for approximately 35% of the score. This reflects on-time payments; late payments, bankruptcies, or foreclosures negatively impact the score.

Amounts owed, or credit utilization, constitute about 30% of a FICO score. This is the percentage of available revolving credit used. Maintaining low balances relative to credit limits demonstrates responsible credit management.

The length of credit history makes up about 15% of the score. This considers the age of the oldest account, the newest account, and the average age of all accounts. A longer history of responsible credit use contributes to a higher score.

New credit, including recent applications and newly opened accounts, accounts for 10% of the score. Opening many new accounts in a short period suggests increased risk. Finally, credit mix, representing diverse credit types like installment loans and revolving credit, contributes the remaining 10%.

The Role of Credit Scores in Mortgage Lending

Credit scores are a foundational element in mortgage lending decisions, extending beyond simple approval or denial. Lenders use these scores to gauge a borrower’s likelihood of repaying the loan. A minimum credit score is a prerequisite for various loan programs. Conventional loans typically require at least a 620 FICO score.

For FHA loans, a 580 score may qualify for a 3.5% down payment, though some lenders require a 620. A score as low as 500 necessitates a 10% down payment. VA loans, backed by the Department of Veterans Affairs, have no minimum credit score set by the VA. Most lenders seek a score of at least 620, though some accept scores as low as 550 or 580.

A credit score directly influences the interest rate offered on a mortgage. Borrowers with higher scores are viewed as less risky, leading to lower interest rates and substantial savings over the loan’s duration. For example, on a $300,000, 30-year fixed-rate mortgage, a borrower with a FICO score of 760 or higher might receive an annual percentage rate (APR) of around 7.162%, resulting in a monthly payment of approximately $2,029. Conversely, a borrower with a 620 FICO score on the same loan might face an APR of about 7.818%, translating to a monthly payment of roughly $2,163. This difference of $134 per month adds up to over $48,000 in additional interest paid over the life of the loan.

Credit scores also affect other loan terms, including down payment requirements and the necessity and cost of private mortgage insurance (PMI). PMI is required for conventional loans when the down payment is less than 20% of the home’s purchase price. A higher credit score can lead to a lower PMI premium, saving hundreds of dollars annually. While debt-to-income (DTI) ratio is not a credit score component, lenders assess it alongside credit scores to evaluate financial health and repayment capacity.

Strategies for Enhancing Your Mortgage Credit Score

Improving a credit score requires consistent financial habits, especially for a mortgage application. Paying all bills on time is a foundational step, as payment history carries the most weight in credit score calculations. Consistent, on-time payments across all credit accounts demonstrate reliability to lenders.

Reducing credit utilization is another impactful strategy. This means paying down revolving credit card balances and keeping the amount of credit used low compared to available credit. Experts recommend maintaining a credit utilization ratio below 30%, but aiming for single-digit utilization results in optimal scores. Lowering this ratio shows responsible management of debt.

Avoiding new credit applications before a mortgage is important. Each new application results in a hard inquiry, which can temporarily lower a credit score. While multiple mortgage inquiries within a short period (14 to 45 days) are treated as a single inquiry, minimize new credit accounts. Additionally, refrain from large purchases or new debt, like a car loan, during the mortgage application process, as these can alter a credit profile.

Regularly checking credit reports for errors is necessary. Inaccuracies can negatively impact a score; disputing them can lead to improvements. Consumers are entitled to a free copy of their credit report from each of the three major bureaus annually through AnnualCreditReport.com. Keeping old, paid-off accounts open benefits credit history length, contributing to the overall score. While maintaining a mix of credit types can be beneficial, approach it responsibly rather than opening new accounts solely for variety.