Which Credit Score Is Used for Mortgage Loans?

Introduction

When it comes to applying for a mortgage loan, your credit score plays a crucial role in determining your eligibility and the interest rates you'll be offered. However, not all credit scores are created equal, and lenders use specific credit scoring models when evaluating mortgage applications. In this article, we'll explore the different credit scores and which one lenders typically use for mortgage loans, providing you with practical insights to help you navigate the process.

Understanding Credit Scores

Before we dive into the specifics of mortgage credit scores, it's essential to understand the basics of credit scoring. Credit scores are three-digit numbers that represent your creditworthiness, ranging from 300 to 850 for FICO scores and 300 to 900 for VantageScore models. These scores are calculated based on various factors, including your payment history, credit utilization, length of credit history, and credit mix.

FICO Scores

FICO (Fair Isaac Corporation) is the most widely used credit scoring model in the United States. There are different versions of FICO scores, each tailored to specific lending purposes. The most common FICO scores used by lenders are:

1. FICO Score 8: This is the most recent and widely used version of the FICO scoring model for general credit evaluations.
2. FICO Bankcard Score: This version is designed specifically for credit card issuers to assess the risk of defaulting on credit card payments.
3. FICO Auto Score: This model is tailored to evaluate the risk associated with auto loans and leases.

VantageScore

VantageScore is a credit scoring model developed by the three major credit bureaus (Experian, Equifax, and TransUnion). While it's gaining popularity, FICO scores are still more widely used by lenders. VantageScore ranges from 300 to 900, with higher scores indicating lower credit risk.

Which Credit Score Is Used for Mortgage Loans?

When it comes to mortgage loans, lenders typically use a specific version of the FICO score called the FICO Mortgage Score. This score is designed specifically to evaluate the risk associated with mortgage lending and is calculated using a different algorithm than the standard FICO Score 8.

The FICO Mortgage Score ranges from 300 to 850, with higher scores indicating a lower risk of defaulting on a mortgage loan. Most lenders require a minimum FICO Mortgage Score of 620 to qualify for a conventional mortgage loan, although some may have higher or lower thresholds depending on their risk tolerance and loan programs.

It's important to note that mortgage lenders may pull credit reports from all three major credit bureaus (Experian, Equifax, and TransUnion) and use the middle score or the lower of the two scores if there are only two available. This approach helps ensure a more comprehensive evaluation of your creditworthiness.

Tips for Improving Your FICO Mortgage Score

If your FICO Mortgage Score needs improvement, there are several steps you can take to boost it and increase your chances of qualifying for a mortgage loan with favorable terms:

1. Pay bills on time: Payment history is the most significant factor in determining your credit score. Late payments, missed payments, or defaults can severely impact your score. Make sure to pay all your bills on time, including credit cards, loans, and utilities.

2. Reduce credit card balances: High credit utilization (the amount of credit you're using compared to your available credit limits) can negatively affect your score. Aim to keep your credit card balances below 30% of your total credit limits.

3. Avoid opening new credit accounts: Opening multiple new credit accounts in a short period can be a red flag for lenders and may temporarily lower your score. Only apply for new credit when necessary.

4. Check for errors on your credit reports: Errors on your credit reports can drag down your score. Review your reports regularly and dispute any inaccuracies with the credit bureaus.

5. Increase credit limits: If you have a good payment history and low credit utilization, you may be able to request higher credit limits from your credit card issuers. This can help improve your credit utilization ratio and potentially boost your score.

6. Be patient: Building and maintaining a good credit score takes time. Consistency is key, so continue practicing good credit habits, and your score should improve gradually.

Conclusion

When applying for a mortgage loan, lenders primarily rely on the FICO Mortgage Score to evaluate your creditworthiness. This specific credit score is designed to assess the risk associated with mortgage lending and plays a crucial role in determining your eligibility and interest rates.

By understanding the importance of your FICO Mortgage Score and taking proactive steps to improve it, you can increase your chances of qualifying for a mortgage loan with favorable terms. Remember, building and maintaining a good credit score is an ongoing process that requires discipline and responsible credit management.