What Credit Score Do Mortgage Lenders Use?

Credit scores are three-digit numbers that summarize an individual’s credit history, serving as a key tool for lenders to assess risk. These scores, generally ranging from 300 to 850, reflect how responsibly a person manages credit. A higher score signals lower risk to lenders, indicating a greater likelihood of on-time debt repayment. This numerical assessment is fundamental when seeking significant loans like a mortgage, as it directly influences lending decisions and the terms offered.

Understanding Mortgage Credit Scores

Mortgage lenders primarily rely on specific, older versions of FICO Scores to evaluate an applicant’s creditworthiness. The three main FICO versions commonly used for mortgages include FICO Score 2 from Experian, FICO Score 4 from TransUnion, and FICO Score 5 from Equifax. These models are tailored to predict the likelihood of mortgage default, providing lenders with a specialized risk assessment.

Mortgage lenders often obtain a “tri-merge” credit report, which compiles information and scores from all three major credit bureaus. If an applicant has three scores, the lender typically uses the middle score for their lending decision. In cases with a co-borrower, the lowest middle score between the two applicants is generally considered.

While FICO Scores are the standard for most mortgage lending, especially for loans intended for sale to government-sponsored enterprises like Fannie Mae and Freddie Mac, other scoring models exist. The Federal Housing Finance Agency (FHFA) has announced upcoming changes for 2025, which may lead to the adoption of newer FICO models, such as FICO 10 T, and VantageScore 4.0 by Fannie Mae and Freddie Mac. This shift could introduce changes to how credit risk is assessed in the mortgage market, as VantageScore models can incorporate trended data and rent payment history.

Key Factors in Mortgage Credit Scoring

FICO Scores used by mortgage lenders are calculated based on several factors, each with a specific weight. Payment history is the most influential component, accounting for approximately 35% of a FICO Score. This factor reflects an individual’s record of paying bills on time, with consistent on-time payments demonstrating reliability. Late or missed payments can substantially reduce a score.

Amounts owed, also known as credit utilization, constitutes about 30% of the FICO Score. This ratio compares total outstanding debt on revolving credit accounts to total available credit. A lower utilization ratio signals responsible credit management; keeping it below 30% is often recommended.

The length of credit history makes up approximately 15% of the score. A longer history of credit accounts provides lenders with more data to assess consistent financial behavior. New credit, which includes recent credit inquiries and newly opened accounts, accounts for about 10% of the score. Too many recent applications can temporarily lower a score. Finally, credit mix, representing the variety of credit accounts an individual manages, contributes around 10% to the FICO Score. A diverse credit portfolio indicates an ability to handle different types of debt responsibly.

How Lenders Utilize Credit Scores

Mortgage lenders consider credit scores as a significant component in their assessment of a borrower’s financial health, alongside income, assets, and debt-to-income (DTI) ratio. Lenders use the credit score to assess lending risk and determine the interest rate and other mortgage terms.

Different types of mortgage loans have varying minimum credit score requirements. For conventional loans, a minimum FICO score of 620 is typically sought. Government-backed loans offer more flexible options. FHA loans, insured by the Federal Housing Administration, may allow scores as low as 500 with a 10% down payment, or 580 with a 3.5% down payment. VA loans, for eligible military service members and veterans, and USDA loans, for rural properties, do not have a government-mandated minimum credit score, but lenders often prefer scores around 620 to 640 or higher.

A higher credit score translates to a lower interest rate, leading to substantial savings over the life of the loan. Lenders view higher scores as an indication of lower risk, while lower scores often result in higher interest rates and potentially higher fees. Lenders frequently use credit score “bands” or “tiers” for pricing, meaning a small improvement in score could lead to better loan terms.

Strategies for Improving Your Mortgage Credit Score

Consistently paying all bills on time is important, as payment history accounts for a significant portion of a FICO Score. Setting up payment reminders or automatic payments can help ensure timely fulfillment of financial obligations.

Reducing credit card balances is effective, as high credit utilization negatively impacts a score. Keeping credit utilization below 30% is recommended, as lower percentages correlate with higher scores. This can be achieved by paying down revolving debt or requesting a higher credit limit.

Avoiding new credit accounts before a mortgage application is advisable. Each new credit application results in a hard inquiry, which can temporarily lower the score. Minimizing new credit activity ensures the score remains strong for the mortgage application. Regularly checking credit reports from all three major bureaus is important to identify and dispute errors. Maintaining a diverse credit mix can also be beneficial, as it demonstrates the ability to handle various types of credit responsibly.