Which Credit Score Do Mortgage Lenders Use?

For many people, purchasing a home represents a significant financial milestone. This endeavor often involves securing a mortgage, a process where your credit score plays a substantial role. While you might be familiar with general credit scores, the specific versions mortgage lenders use can be more intricate. Understanding which scores are considered and how they are applied is an important step for anyone preparing to apply for a home loan.

The Specific Mortgage Credit Scores

Various credit scoring models exist, including popular ones like VantageScore, but mortgage lenders primarily rely on specific versions of FICO scores. These scores are designed to assess the risk associated with a large, long-term loan like a mortgage. Lenders predominantly use three classic FICO models for mortgage applications: FICO Score 2 from Experian, FICO Score 4 from TransUnion, and FICO Score 5 from Equifax. These older, industry-specific versions are preferred because they offer a consistent and established framework for evaluating mortgage risk that has been in use for many years.

Mortgage lenders typically obtain a “tri-merge” credit report, which consolidates credit data and FICO scores from all three major credit bureaus: Experian, Equifax, and TransUnion. This comprehensive report provides lenders with a complete picture of your credit history, as each bureau might have slightly different information, ensuring no crucial details are missed.

When evaluating a mortgage application, lenders commonly apply the “middle score” rule. From the three FICO scores in the tri-merge report, the lender uses the middle score for their underwriting decision. For example, if your scores are 720 (Experian), 740 (TransUnion), and 710 (Equifax), the middle score of 720 would be used. For joint applications, the lender pulls three scores for each applicant, determines each individual’s middle score, and then uses the lower of those two middle scores for qualification.

How Mortgage Lenders Use Credit Scores

Credit scores influence your mortgage loan eligibility, interest rate, and potential loan amount. A higher credit score indicates lower risk to lenders, leading to more favorable terms and lower interest rates. Conversely, a lower score can result in a higher interest rate, increasing the total loan cost.

Lenders have varying thresholds, but a score of 670 or higher is considered good, and scores of 760 or above often secure the most competitive rates. Most lenders require a score of at least 620 for many home loans.

Minimum credit score requirements vary by loan type. Conventional loans, which are not government-backed, generally require a minimum score of 620, though a higher score around 720 or more can secure better terms. Federal Housing Administration (FHA) loans require a minimum FICO score of 580 for a 3.5% down payment, or 500 with a 10% down payment. For VA loans, while the VA sets no official minimum, most lenders require a score of at least 620.

While credit scores are important, lenders also consider other financial factors when evaluating a mortgage application. These include your debt-to-income (DTI) ratio, which compares your monthly debt payments to your gross monthly income, employment history, available assets, and the size of your down payment. Lenders assess these elements to understand your financial capacity and willingness to repay the loan.

Accessing Your Mortgage-Specific Credit Information

To understand the data influencing your mortgage-specific credit scores, obtain a free copy of your credit report from Experian, Equifax, and TransUnion once a week at AnnualCreditReport.com. These reports contain detailed information about your payment history, credit accounts, and inquiries that credit scoring models use. However, these free reports do not include the specific FICO Score 2, 4, and 5 versions that mortgage lenders use.

To obtain your specific FICO mortgage scores, you can acquire them through paid services directly from FICO, such as myFICO.com, or from certain credit monitoring services that offer these versions. Reviewing your credit reports for accuracy is important, as errors can negatively impact your scores.

Key elements influencing your mortgage scores include:

• Your payment history
• The amount of credit you are using relative to your available credit (credit utilization)
• The length of your credit history
• The types of credit accounts you have

Addressing any discrepancies and maintaining responsible credit habits can contribute to stronger mortgage credit scores.