Which Credit Score Do Mortgage Lenders Use?

💡 You’ve been eyeing that dream house, huh? 🏠 But before you can bid, you’ve got to know your credit score – the right one. Mortgage lenders aren’t just pulling any number out of a hat. They rely on specific FICO scores that tell them whether you’re a highflying borrower or if you need to pump the brakes a bit. Let’s see what score they use and how you can be ready to score big. 😉

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Credit scores used by mortgage lenders

When it comes to getting a mortgage, FICO is the name of the game. While you might be familiar with the general concept of a FICO score, you may not know that mortgage lenders tend to use a specific variation of these scores. And yes, these variations can make all the difference. Let’s breakdown which scores they use when deciding whether you’re approved for your new digs.

FICO is the primary score for mortgage applications, but three versions are provided by different credit bureaus. Mortgage lenders pull your scores from Experian, Equifax and TransUnion to assess your creditworthiness. The aim? To get the most accurate understanding of your financial habits.

FICO Score 2 (Experian)

The FICO Score 2, the Experian/Fair Isaac Risk Model v2, is the version mortgage lenders use to see your credit activity via Experian. This score emphasizes factors like payment history and overall debt levels to evaluate your reliability when paying back loans. 📝

FICO Score 5 (Equifax)

With FICO Score 5, lenders look at your credit report from Equifax. This model gives weight to your payment behavior, particularly regarding large accounts like loans and lines of credit. Any history of late payments or missed bills? Score 5’s got it covered, which matters a lot to lenders.

FICO Score 4 (TransUnion)

Finally, the FICO Score 4 from TransUnion is another variant lenders rely on. Like its counterparts, this score examines debt usage and payment consistency to help lenders gauge how responsibly you handle credit.

Why some mortgage lenders may pull all three credit scores

You might be wondering – why do mortgage lenders check all three credit scores? Here’s the deal: none of the credit bureaus have the full picture of your financial life. Since different creditors may report to different bureaus, pulling all three scores provides a comprehensive bird’s-eye view of your financial habits. 🧐 Lenders often use the middle score – the score that falls between your highest and lowest – as a measure of your creditworthiness. Think of it as a fail-safe that gives the lender a more reliable indicator than anyone score alone.

Minimum credit score requirements for mortgages

Wondering what score you need to get into the mortgage game? Each type of mortgage has its own unique credit score requirements. Here’s a breakdown:

• Conventional loans: Conventional loans typically require a minimum credit score of 620. These are standard loans that the government doesn’t insure, meaning lenders take on more risk. Consequently, a higher score helps demonstrate you’re a responsible borrower. If you want the best rates, aim for a score above 700.
• FHA loans: For FHA loans, which the Federal Housing Administration insures, the minimum score requirement is usually 580 – though some lenders might approve loans with scores as low as 500 if you have a larger down payment. These loans are designed for those with limited credit history or less-than-perfect scores, making them an accessible option for first-time homebuyers.
• VA loans: VA loans are available to veterans, active service members and eligible spouses and are insured by the Department of Veterans Affairs. The VA has no set minimum credit score requirement, but most lenders prefer a score of at least 620. With favorable terms like no down payment, VA loans are one of the best options for those who have served.
• USDA loans: USDA loans are aimed at individuals looking to buy homes in rural areas and come with favorable terms for low to moderate-income applicants. While there isn’t an official minimum credit score, most lenders prefer 640 or above for these government-backed loans. You can learn more about USDA loans from the official USDA site.

Factors that influence your mortgage credit score

When a lender looks at your credit score, they consider several critical factors. Let’s breakdown what’s driving that number:

• Payment history: Your payment history is the most important factor in determining your credit score, accounting for roughly 35% of the total. Lenders want to see a track record of on-time payments – late or missed payments signal risk, which makes you less likely to get a favorable mortgage deal.
• Credit utilization: Refers to how much of your available credit you’re using at any given time. A lower utilization rate – ideally below 30% – is best for your score. This shows lenders that you’re not maxing out your credit cards and managing your credit responsibly.
• Length of credit history: The length of your credit history makes up about 15% of your score. A longer credit history shows stability, while a shorter history means less data for lenders to judge your habits. The key is to keep old accounts open, even if you’re not using them frequently.
• Types of credit accounts: The different types of credit accounts you have – credit cards, student loans, car loans – also influence your score. Having a mix of account types shows lenders you can handle different kinds of credit responsibly, which can work in your favor.
• Recent credit inquiries: If you’ve recently applied for new credit, these hard inquiries can negatively impact your score. Too many inquiries suggest you may be in financial distress, which isn’t a good look if you’re applying for a mortgage.

How to improve your credit scores before applying for a mortgage

Want to give your credit score a boost before applying for a mortgage? Here’s how:

Pay all your bills on time: Payment history makes up 35% of your FICO score, so setting up automatic payments can ensure you never miss a due date. Paying consistently is crucial to showing lenders you can handle regular mortgage payments.

Reduce credit card balances: Lowering your credit utilization below 30% of your available credit limit can significantly boost your score. Focus on paying down the cards with the highest balances first.

Avoid new credit applications: In the months leading up to your mortgage application, it’s best to refrain from applying for new credit. Each hard inquiry temporarily lowers your score, which could harm your mortgage approval.

Keep old credit accounts open: The length of credit history matters, so don’t close old credit accounts. Instead, use them occasionally for small purchases to keep them active.

Check and correct credit reports: Get your credit reports from all three bureaus (Equifax, Experian and TransUnion) and correct any inaccuracies. Errors can drag down your score, so dispute any issues you find.

Know the score before you go

To secure the home of your dreams, it’s crucial to understand which credit scores mortgage lenders use – and what those scores say about you. Most lenders pull all three of your FICO scores to get a complete picture. By understanding how payment history, credit utilization and even the length of your credit history impact your score, you can take actionable steps to improve it before applying. With a bit of planning, you could snag a better rate and save thousands over the life of your mortgage. 🏡✨

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