Which Credit Score is Used for Mortgage Loans?

Introduction

Buying a home is one of the biggest financial decisions most people will make in their lifetime. With such a significant investment on the line, lenders want to ensure that borrowers have a solid credit history and are financially responsible. That's why your credit score plays a crucial role in the mortgage approval process.

If you're planning to apply for a mortgage loan, you might wonder which credit score lenders actually use to evaluate your creditworthiness. In this article, we'll explore the different types of credit scores, the ones lenders typically rely on for mortgage decisions, and some tips to improve your credit score before applying.

Understanding Credit Scores

Before diving into the specifics of which credit score is used for mortgages, let's briefly review what credit scores are and why they matter.

Credit scores are three-digit numbers that represent your creditworthiness based on your credit history. They are calculated by credit scoring models, which analyze various factors from your credit report, such as payment history, outstanding balances, credit utilization, and credit mix.

The two main credit scoring models in the United States are:

1. FICO® Score: Developed by the Fair Isaac Corporation (FICO), this is the most widely used credit scoring model by lenders. FICO scores range from 300 to 850, with higher scores indicating lower credit risk.

2. VantageScore®: Created by the three major credit bureaus (Experian, Equifax, and TransUnion), VantageScore is an alternative credit scoring model that ranges from 300 to 850, similar to FICO scores.

While both scoring models use similar factors to calculate credit scores, they may weigh them differently, resulting in slightly different scores for the same individual.

Which Credit Score is Used for Mortgages?

When it comes to mortgage lending, the FICO score is the industry standard and the most commonly used credit score by lenders. This is because FICO scores have been around longer and have a proven track record in predicting credit risk for various types of loans, including mortgages.

However, it's important to note that lenders may use different versions of the FICO score or consider scores from multiple credit bureaus. The most common versions used for mortgage lending are:

1. FICO® Scores Based on Data from Three Credit Bureaus: Many lenders will consider your FICO scores from all three major credit bureaus (Experian, Equifax, and TransUnion) and use the middle score or the lower of the two highest scores.

2. FICO® Bankcard Scores: Some lenders may also review your FICO Bankcard scores, which are tailored specifically for credit card lending but can provide additional insights into your creditworthiness.

While VantageScores are gaining popularity in other lending areas, such as auto loans and personal loans, they are not widely used for mortgage lending decisions as of now.

Improving Your Credit Score for a Mortgage

Regardless of which credit score version a lender uses, having a higher credit score generally improves your chances of getting approved for a mortgage and securing better interest rates. Here are some tips to help improve your credit score before applying for a mortgage:

1. Review your credit reports: Start by obtaining your credit reports from the three major credit bureaus (Experian, Equifax, and TransUnion) and review them carefully for any errors or inaccuracies. Dispute any incorrect information to ensure your credit reports are accurate.

2. Pay bills on time: Payment history is the most significant factor affecting your credit score. Make sure to pay all your bills (credit cards, loans, utilities, etc.) on time and in full whenever possible.

3. Reduce outstanding balances: High credit card balances can negatively impact your credit utilization ratio, which is the amount of credit you're using compared to your total available credit. Aim to keep your credit utilization below 30% for each credit card and overall.

4. Limit new credit applications: Each time you apply for new credit, it can result in a hard inquiry on your credit report, which can temporarily lower your credit score. Limit new credit applications unless necessary.

5. Maintain a diverse credit mix: Having a mix of different types of credit accounts (e.g., credit cards, auto loans, mortgages) can positively impact your credit score by demonstrating responsible credit management across various products.

6. Be patient: Building and improving your credit score takes time and consistent responsible credit behavior. It's essential to be patient and maintain good credit habits over an extended period.

Conclusion

When it comes to mortgage lending, the FICO score is the predominant credit score used by lenders to evaluate creditworthiness. Lenders typically consider your FICO scores from the three major credit bureaus, with the middle score or the lower of the two highest scores being the most common approach.

While having a high credit score is crucial for getting approved for a mortgage and securing favorable interest rates, it's just one factor lenders consider. They also review your income, employment history, debt-to-income ratio, and other financial factors.

By understanding which credit score lenders use for mortgages and taking steps to improve your credit score, you can increase your chances of getting approved for a home loan and potentially save thousands of dollars in interest over the life of the mortgage.

Remember, building and maintaining a strong credit profile is an ongoing process that requires responsible credit management and patience. Start working on improving your credit score well before you plan to apply for a mortgage to give yourself the best opportunity for a successful home-buying journey.