Which FICO Score Do Mortgage Lenders Use?
Uncover the precise FICO score models mortgage lenders utilize for home loan qualification and how they shape your financing terms.
A FICO score numerically represents an individual’s credit risk, summarizing their creditworthiness for lenders. It is a crucial component in financial assessments, particularly for mortgages, directly influencing a lender’s decision-making process.
Understanding FICO Scores in Mortgage Lending
FICO scores, developed by the Fair Isaac Corporation, provide a standardized method for lenders to evaluate the likelihood of a borrower repaying a loan. These three-digit numbers, typically ranging from 300 to 850, are derived from information within an individual’s credit reports. A higher score generally indicates a lower credit risk, making a borrower more attractive to lenders.
FICO has developed numerous scoring models tailored for different lending sectors, recognizing that credit risk factors can vary across industries. For instance, the criteria for assessing a credit card applicant might differ from those for an auto loan. Lenders in the mortgage sector use FICO models that align with their unique risk assessment needs and regulatory requirements.
Key FICO Models for Mortgage Qualification
For conventional mortgages, particularly those eligible for purchase by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, lenders predominantly utilize specific older versions of FICO scores. These “Classic FICO” models are FICO Score 2 from Experian, FICO Score 4 from TransUnion, and FICO Score 5 from Equifax. These versions have been consistently applied within the mortgage industry due to their long-standing reliability and widespread adoption.
Mortgage lenders typically obtain credit reports and associated FICO scores from all three major credit bureaus. This comprehensive review provides a holistic view of an applicant’s credit history. Despite newer models, these older versions remain the standard for a significant portion of the mortgage market.
Impact of FICO Scores on Mortgage Terms
The FICO scores pulled by mortgage lenders directly influence various aspects of a borrower’s loan application, including eligibility for loan programs, the interest rates offered, and the overall loan terms. A higher FICO score generally signifies a lower risk, often leading to more favorable rates and broader loan product availability. For instance, conventional loans typically require a minimum FICO score of around 620, while government-backed loans, such as FHA loans, may accept scores as low as 500 or 580, though often with higher down payment requirements.
Lenders commonly employ a “middle score” rule when evaluating an applicant’s FICO scores. If a single borrower has three scores from the major bureaus, the lender will typically use the median score for qualification purposes. In situations with multiple borrowers, lenders often use the lower of the two median scores between the applicants. For example, a FICO score in the “good” range, generally 670 to 739, or “very good” and “excellent” ranges (740 and above), can significantly improve a borrower’s chances of securing competitive interest rates.
Mortgage Lending and FICO Scores in 2020
The year 2020 presented unique market conditions that influenced how FICO scores were interpreted in mortgage lending. Amid economic uncertainty, many mortgage lenders tightened their lending standards, which included raising minimum FICO score requirements for various loan types. This adjustment aimed to mitigate increased risk during a period of rising unemployment and economic volatility. Consequently, the median credit scores of new mortgage borrowers in 2020 reached their highest levels in two decades, reflecting a shift towards lending to lower-risk applicants.
Despite these shifts in lending criteria, the foundational FICO models used by mortgage lenders for conventional loans remained consistent. In 2020, the Federal Housing Finance Agency (FHFA) validated the continued use of the Classic FICO models by Fannie Mae and Freddie Mac. FICO also communicated that its scores would not be negatively impacted by loan forbearance or deferment agreements, provided these accounts were reported as “current” by lenders.