Introduction
Buying a home is one of the most significant financial decisions you'll make in your lifetime. Lenders scrutinize various factors when evaluating mortgage applications, and one of the most crucial elements is your credit score. But what exactly is the credit score used for a mortgage, and how can you ensure you have a score that qualifies you for the best rates and terms? In this article, we'll dive deep into this topic, providing you with practical insights and actionable advice.
Understanding Credit Scores
Before we explore the specific credit score used for mortgages, it's essential to understand the basics of credit scores. Credit scores are three-digit numbers ranging from 300 to 850, calculated based on your credit history and payment behavior. The higher your score, the more creditworthy you appear to lenders.
There are two primary credit scoring models used in the United States: FICO and VantageScore. While both models use similar factors to calculate your score, such as payment history, credit utilization, and credit mix, they may weigh these factors differently, resulting in slightly different scores.
The Credit Score Used for Mortgages
When it comes to mortgages, the credit score used by most lenders is the FICO score. Specifically, they rely on the FICO Mortgage Score, a version of the FICO score tailored for mortgage lending decisions. This score considers your credit history and payment behavior, but it also places a greater emphasis on mortgage-related information, such as your payment history on previous mortgages or rent payments.
Lenders typically use the middle score of the three FICO scores (Experian, Equifax, and TransUnion) for each applicant. If you're applying with a co-borrower, the lender will use the lower of the two middle scores.
Credit Score Ranges for Mortgages
While credit score requirements can vary among lenders and loan programs, here are some general guidelines for the credit score ranges used for mortgages:
- Excellent Credit (760+): With a credit score in this range, you'll likely qualify for the best mortgage rates and terms.
- Good Credit (700-759): Lenders consider this a solid credit score range, and you should still be able to secure competitive mortgage rates.
- Fair Credit (650-699): While not ideal, you may still qualify for a mortgage with a fair credit score, but you'll likely face higher interest rates and less favorable terms.
- Poor Credit (below 650): Obtaining a mortgage with a poor credit score can be challenging, and you may need to explore alternative lending options or work on improving your score before applying.
It's important to note that these ranges are general guidelines, and lenders may have their own specific credit score requirements based on the loan program and other risk factors.
Improving Your Credit Score for a Mortgage
If your credit score falls below the desired range for the best mortgage rates and terms, there are several steps you can take to improve it:
-
Check your credit reports: Obtain copies of your credit reports from the three major credit bureaus (Experian, Equifax, and TransUnion) and review them for any errors or inaccuracies. Dispute any incorrect information with the respective credit bureau.
-
Pay bills on time: Payment history is the most significant factor affecting your credit score. Make sure to pay all your bills, including credit card payments, utility bills, and rent, on time.
-
Reduce credit card balances: High credit utilization (the amount of credit you're using compared to your credit limits) can negatively impact your score. Aim to keep your credit card balances below 30% of your total credit limits.
-
Limit new credit applications: Each time you apply for new credit, it results in a hard inquiry on your credit report, which can temporarily lower your score. Avoid applying for too much new credit in the months leading up to your mortgage application.
-
Increase credit limits: If you have a good payment history with your credit card issuers, you can request a credit limit increase. A higher credit limit can lower your credit utilization ratio and potentially improve your score.
-
Consider a credit-builder loan or secured credit card: If you have a thin credit file or a history of poor credit, a credit-builder loan or a secured credit card can help you establish or rebuild your credit history.
Remember, improving your credit score takes time and consistent effort. Start working on improving your credit as early as possible before applying for a mortgage to increase your chances of qualifying for the best rates and terms.
Conclusion
When it comes to mortgages, the credit score lenders primarily use is the FICO Mortgage Score. This score is designed specifically for mortgage lending decisions and considers your overall credit history, payment behavior, and mortgage-related information. By understanding the credit score ranges and requirements for mortgages, you can take proactive steps to improve your credit score and secure more favorable loan terms. Maintain a good credit history, reduce credit card balances, and monitor your credit reports regularly to position yourself for success when applying for a mortgage.