Which Score Do Lenders Use for a Mortgage Application?

Understanding which credit scores are used for mortgage applications is an important step for prospective homebuyers. Not all credit scores hold the same weight with mortgage lenders, and the specific models utilized can significantly impact loan eligibility and terms. This article will clarify the distinct credit scores and how they are applied during the mortgage underwriting process.

Credit Scoring Models for Mortgages

Mortgage lenders predominantly rely on specific versions of the FICO Score, often referred to as “classic” FICO scores. These models are mandated for conventional loans that government-sponsored enterprises, such as Fannie Mae and Freddie Mac, purchase. The three primary FICO Score versions used are FICO Score 2 from Experian, FICO Score 4 from TransUnion, and FICO Score 5 from Equifax.

These specific FICO scores are distinct from other widely available consumer credit scores, such as FICO Score 8, FICO Score 9, or various VantageScore models. While these other scores are frequently provided by free credit monitoring services, they are generally not used for mortgage lending decisions. The mortgage industry’s reliance on these older, established FICO versions ensures consistency and a standardized risk assessment across the market.

When evaluating a mortgage application, lenders typically obtain a tri-merge credit report, which combines credit information and scores from all three major credit bureaus: Experian, Equifax, and TransUnion. This comprehensive report provides lenders with a complete picture of an applicant’s credit history across different reporting agencies.

How Mortgage Lenders Evaluate Credit Scores

Mortgage lenders apply a specific methodology when evaluating the multiple credit scores obtained from the three bureaus. This approach is commonly known as the “middle score” rule. For a single applicant, the lender will typically use the middle of the three FICO scores reported by Experian, Equifax, and TransUnion. If two of the three scores are identical, that score becomes the selected middle score.

When there are multiple applicants for a mortgage, lenders generally consider the lowest middle score among all applicants. For example, if one applicant has a middle score of 720 and another has a middle score of 680, the lender will typically use the 680 score for qualifying purposes.

Different types of mortgage loans have varying baseline credit score requirements. For conventional loans, a minimum credit score of 620 is generally needed, though scores of 740 or higher often qualify for the most favorable interest rates and terms. Federal Housing Administration (FHA) loans are more flexible, typically requiring a minimum FICO score of 580 for a 3.5% down payment, or 500 with a 10% down payment, though many FHA lenders still prefer a score of 620 or higher. Veterans Affairs (VA) loans typically require a score of at least 620, while some may accept scores as low as 550. United States Department of Agriculture (USDA) loans typically look for a score of 640 or above for automatic approval.

A higher credit score can lead to more advantageous loan terms, including lower interest rates, reduced fees, and access to a wider selection of loan products. Conversely, a lower score may result in a higher interest rate, increasing the overall cost of the loan over its lifetime. While credit scores are a significant factor, lenders also consider other aspects of an applicant’s financial profile, such as income, debt-to-income ratio, and the amount of down payment.

Key Factors Influencing Your Mortgage Credit Score

FICO Scores, including the versions used for mortgages, are calculated based on five primary categories of financial information within a credit report. Each category contributes a different percentage to the overall score. Understanding these components can help individuals comprehend how their actions impact their creditworthiness.

Payment History

Payment history is the most impactful factor, accounting for approximately 35% of a FICO Score. This category assesses an individual’s track record of making payments on time for all credit accounts. Consistent, timely payments demonstrate reliability, while late payments, collections, or bankruptcies can significantly lower a score.

Amounts Owed

The amounts owed, or credit utilization, makes up about 30% of the score. This factor evaluates the total amount of debt an individual carries and how much of their available credit is being used. A lower credit utilization ratio, meaning a smaller proportion of available credit is in use, generally indicates responsible credit management and can positively influence a score.

Length of Credit History

The length of credit history contributes approximately 15% to the score. This considers the age of an individual’s oldest credit account, the age of their newest account, and the average age of all accounts. A longer history of responsible credit use tends to result in a higher score, as it provides more data for predicting future behavior.

New Credit

New credit accounts for about 10% of the score. This category examines the number of recently opened credit accounts and recent credit inquiries. Opening multiple new accounts in a short period can be seen as a higher risk and may temporarily lower a score. Hard inquiries, which occur when applying for new credit, can also have a minor, temporary impact.

Credit Mix

Finally, the credit mix comprises around 10% of the score. This factor assesses the different types of credit accounts an individual manages, such as revolving credit (e.g., credit cards) and installment loans (e.g., car loans, student loans). Demonstrating the ability to responsibly manage a variety of credit types can be viewed favorably.

Steps to Prepare Your Credit for a Mortgage Application

Preparing one’s credit well in advance of a mortgage application can significantly improve the chances of approval and secure more favorable loan terms. A foundational step involves obtaining and reviewing credit reports from all three major bureaus: Equifax, Experian, and TransUnion. These reports can be accessed annually at no cost. Thoroughly examining each report for any errors or inaccuracies, such as incorrect late payments or accounts that do not belong to you, is important. Any discrepancies found should be disputed with the respective credit bureau immediately to ensure the information is correct before applying for a loan.

A key action to strengthen a credit profile is reducing revolving debt, particularly on credit cards. Paying down balances to lower credit utilization ratios can have a substantial positive impact on credit scores. Lenders view lower utilization as a sign of responsible financial management and reduced risk. Maintaining balances below 30% of the credit limit, or even lower, is a common recommendation for optimizing this factor.

It is also advisable to avoid opening new credit accounts or closing old ones in the months leading up to a mortgage application. Opening new accounts can generate hard inquiries on a credit report, which may temporarily lower a score. Similarly, closing older accounts can shorten the length of credit history and potentially increase the credit utilization ratio by reducing the total available credit.

Consistently making all payments on time and in full is the most impactful habit for credit health. Payment history holds the greatest weight in FICO score calculations, making timely payments paramount for demonstrating financial reliability. Establishing a consistent record of on-time payments over several months can steadily improve a credit score. The focus should remain on responsible management of existing credit.