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Credit Scores and Reports

Which credit scores do mortgage lenders use?

If you’re in the market to buy or refinance, find out which of your scores prospective lenders want to see

Summary

If you’re buying a home and want to get the best mortgage available, learn which credit scores mortgage lenders need to see. Then, work on getting yours as high as possible.

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Because there are several types of credit scores – and three credit bureaus to which creditors report – it’s hard to keep up with which one is which.

For example, the FICO score model is most widely used by lenders. Its closest competitor is VantageScore, which was launched in 2008.

And each has many versions.

In addition, each of the three credit bureaus might have different credit scores for you based on the information they keep on file.

And some big lenders even use an in-house custom scoring model developed by their statisticians or a third party.

If you’re looking for a mortgage, it’s crucial you know which credit score the powers that be will use to decide your fate.

Keep reading to find out what score most lenders use when assessing potential borrowers for home loans.

See related: Credit cards that offer free credit scores

Mortgage lenders typically use FICO scores

The simple answer to the question is, mortgage lenders typically use your FICO score to determine if you’d be a good bet for a mortgage.

You might be wondering why mortgage lenders use the FICO model.

It’s simple: They have identified a strong parallel between FICO credit scores and consumers’ mortgage-paying performance.

Basically, the lower your FICO score is, the more likely you are to default on your mortgage.

But it’s not that cut-and-dried.

Mortgage lenders tend to use all three of your scores – from Experian, TransUnion and Equifax – to evaluate you for a home loan.

As mentioned, there are different versions of the FICO score, and each credit bureau uses a specific one to determine borrowers’ creditworthiness.

Here are the FICO scores mortgage lenders typically use from each bureau:

  • Experian: FICO Score 2 based on Experian data; also known as Experian/Fair Isaac Risk Model Version 2
  • Equifax: FICO Score 5 based on Equifax data; also called Equifax Beacon 5.0
  • TransUnion: FICO Score 4 based on TransUnion data; also called TransUnion FICO Risk Score 04

These scores, which range from 300 to 850, dominate the mortgage market because most home loans purchased or securitized by Fannie Mae and Freddie Mac require them, said Alisa Glutz, licensed mortgage professional and author of the book Color My Credit.

These versions of FICO work in conjunction with the current automated underwriting systems each entity requires use of to determine loan eligibility, Glutz said.

“We must request these FICO credit scores for each borrower from each of the three major credit repositories when we order the three-in-file merged credit report,” she added.

Glutz noted that a 20-point difference in the credit score being used can adjust the monthly payment on a home significantly.

A credit score of 800 on an owner-occupied, single-family home will afford you the lowest interest rate with a bank – every 20 points lower than 800 increases the interest rate and mortgage insurance (if you’re putting less than 20% down) at most banks.

“Someone with a 670 versus a 680 could pay 0.25% higher or more in the interest rate depending on the loan amount and down payment amount,” Glutz revealed.

Glutz doesn’t see the version in use being outdated any time soon.

In order for Fannie Mae and Freddie Mac to update the credit score version used to buy a home, the desktop automated underwriting systems would have to be updated as well, which could take years, according to Glutz.

She also noted that consumers do not have access to these specific mortgage scores unless they receive them from a mortgage loan officer or purchase them as part of a package on MyFICO.com.

Keep in mind, said Glutz, that none of the scores provided to consumers for free through their banks, free websites or credit card companies are the FICO versions required for home lending.

And it gets even more complicated.

See related: 7 ways to attract targeted credit card offers

Lenders use scores from all three credit bureaus

If an applicant’s credit file is too thin, an underwriter might decide a mortgage isn’t even a possibility, Glutz explained.

But if a borrower’s score is in the ballpark, the underwriter will usually request all three of their FICO scores from the credit bureaus, she added.

If all three of those scores are different, the lender will use the middle score, according to Glutz.

But she cautioned that if two of your FICO scores are the same, they will use that score, even if it’s higher or lower than the third one.

So that means if you have two 750 scores and an 820 score, a mortgage lender will use the 750 number.

And Glutz noted that if you are applying for the mortgage with another person, the lender will calculate each applicant’s score from the three and use the lower of the two scores.

That’s why it’s important to make sure your borrowing partner is successfully managing their credit.

Lenders might use only one score in some cases

“We use all three bureaus’ scores – Experian, Equifax and TransUnion,” said Christopher M. Petersen, president and CEO of CP Financial & CP Realty.

There are some caveats associated with certain programs.

“For instance, on some home equity lines of credit we use only one bureau’s score, but for the vast majority we utilize all three,” Petersen said.

And in some rare cases, a borrower may have only two scores, in which case he would use the lower score.

“In the past, there were programs that would utilize the average of the top two scores, but that is rarely used now,” Petersen said.

See related: How many credit cards do you need to get a mortgage?

How your FICO Score breaks down

It’s important to know how your FICO score is calculated. It consists of five categories, weighted differently:

  • Payment history: This is the most important factor in your score and counts for 35%. Any lender extending a mortgage wants to see how the borrower pays his or her bills so they can assess their amount of risk.
  • Amounts owed: The second most important factor in your FICO score is how much you owe, weighing in at 30%. Also known as credit utilization, this number tells the lender how much of your available credit you’re actually using. If your number is high, it could mean you’re overextending. According to Experian, a good rule of thumb is to try to keep your total credit utilization rate below 30%. However, the closer to 0% credit utilization, the better.
  • Length of credit history: Lenders want to know how long you’ve had a credit history, and it counts for 15% of your score. Typically, a longer credit history increases your score.
  • New credit: If you’ve opened several credit cards in a short time, it might be a red flag for a mortgage lender. This category counts for 10% or your overall score.
  • Credit mix: Your credit mix – the different kinds of credit you have, such as credit cards, finance company accounts, other mortgage loans, retail accounts and installment loans – counts for 10% of your score. Lenders like to see that you know how to handle different kinds of credit.

FICO scores generally range between 300 and 850, and here’s what those scores mean:

  • 800 to 850: Exceptional
  • 740 to 799: Very good
  • 670 to 739: Good
  • 580 to 669: Fair
  • 300 to 579: Poor

See related: Educational credit scores are not the same as FICO scores

Get your score in shape before you apply

Because your credit scores not only determine if you can get a mortgage but also the interest rate you’ll pay, it’s important to get your credit file in the best shape possible before you apply for that home loan.

The best thing borrowers can do is to get their reports in advance to make sure that there are no “skeletons in the closet,” according to Kevin Leibowitz, owner of Grayton Mortgage.

Leibowitz recommends getting a copy of your credit report for free (once annually) from all three credit bureaus by visiting AnnualCreditReport.com.

Next, he said, go over it with a fine-tooth comb to see if there are any items that are incorrect – and if there are, fix them immediately.

Shane Whitteker, owner and chief broker of Principle Home Mortgage, said that aside from paying your bills on time, the most important thing to watch for when you’re trying to optimize your score is collections hitting your report.

If you find yourself in a situation where you are struggling to pay medical bills, for example, set up a payment plan to keep the invoice from going to a collection company. Regardless of the amount you are paying on a medical bill, you will not be sent to collection in most cases if you make the payment.

“You could take this approach with any bill that is in jeopardy of going to collection – the creditor may not agree to the payment terms, but it is worth a shot,” Whitteker said.

Whitteker also suggests keeping your credit card balance as low as possible compared to your credit limit.

He also mentioned that it’s important not to get too many credit inquiries before you apply for a mortgage – hard inquiries can lower your score significantly.

For example, if you buy a car be aware that the dealership will most likely pull your credit, which could signal to a mortgage lender that you’re buying a car and a house and you might get in over your head.

But Whitteker pointed out that when you are shopping for a mortgage you have a two-week window in which lenders can pull your credit without it having a negative impact on your score.

According to FICO, “most credit scores are not affected by multiple inquiries from auto, mortgage or student loan lenders within a short period of time.”  This could be 14 days for older versions of the FICO score, but newer models allow for a 45-day window of rate shopping.

Because these credit pulls are usually viewed as a single inquiry, they won’t have a significant impact on your score.

“I wouldn’t go overboard with this, but the practice is set in place so people can shop for a mortgage without hurting their credit scores,” he said.

Last, Whitteker suggested setting up some way of monitoring your own credit so you are aware if you become a victim of identity theft.

Being proactive with this cannot only increase your chances of getting the mortgage you want but also save you a huge headache down the road.

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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