Which Credit Score Is Used for Mortgages?

Introduction

If you're planning to buy a home and apply for a mortgage, one of the most crucial factors lenders consider is your credit score. But with multiple credit scoring models out there, you might be wondering: which credit score is used for mortgages? In this article, we'll dive into the specifics, help you understand the credit score requirements, and provide practical tips to improve your score for better mortgage terms.

The Credit Score Used for Mortgages

When it comes to mortgage applications, lenders primarily rely on FICO scores, which are the credit scores developed by the Fair Isaac Corporation. FICO scores are the most widely used credit scoring models in the lending industry, including for mortgages.

There are different versions of FICO scores, but the most commonly used for mortgage purposes are:

1. FICO Score 8: This is the most recent and widely used version of the FICO score. It ranges from 300 to 850, with a higher score indicating lower credit risk.

2. FICO Score 2, 4, and 5: These are older versions of the FICO score that are still used by some lenders, especially for specific loan programs like FHA (Federal Housing Administration) or VA (Department of Veterans Affairs) loans.

It's worth noting that lenders may use different FICO score versions depending on their preferences and the specific loan program you're applying for.

Credit Score Requirements for Mortgages

While credit score requirements can vary among lenders and loan programs, here are some general guidelines for the minimum FICO scores needed for various mortgage types:

• Conventional Loans: Typically, a FICO score of at least 620 is required for conventional mortgages backed by Fannie Mae or Freddie Mac. However, higher scores (700 or above) can qualify you for better interest rates and terms.

• FHA Loans: The minimum FICO score required for FHA loans is typically 580 for borrowers with a down payment of at least 3.5%. If your score is between 500 and 579, you may still qualify, but you'll need to make a larger down payment of at least 10%.

• VA Loans: There is no official minimum credit score requirement for VA loans, but most lenders prefer a FICO score of at least 620 for approval.

• USDA Loans: The minimum FICO score required for USDA (United States Department of Agriculture) loans is typically 640, but some lenders may have slightly different requirements.

It's important to note that these are general guidelines, and lenders may have their own specific credit score requirements based on their risk assessment and underwriting criteria.

Improving Your Credit Score for Better Mortgage Terms

If your credit score doesn't meet the desired requirements or if you want to qualify for better interest rates and terms, there are several steps you can take to improve your score:

1. Check Your Credit Report: Obtain your credit reports from the three major credit bureaus (Experian, Equifax, and TransUnion) and review them for any errors or inaccuracies. Dispute any errors with the respective credit bureau to have them corrected.

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 Debt Balances: High credit card balances and high credit utilization ratios (the amount of credit you're using compared to your total available credit) can negatively impact your score. Pay down your outstanding balances as much as possible.

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

5. Increase Credit Limits: If you have a good payment history with your credit card issuers, you can request a credit limit increase. Having higher credit limits can lower your credit utilization ratio and potentially improve your score.

6. Be Patient: Credit scores take time to improve, especially if you've had past negative items like late payments or collections. Consistent good credit behavior over time will gradually improve your score.

Conclusion

When applying for a mortgage, lenders primarily use FICO scores, with FICO Score 8 being the most common version used. Having a higher FICO score can not only increase your chances of mortgage approval but also qualify you for better interest rates and loan terms.

If your credit score doesn't meet the desired requirements, take proactive steps to improve it by paying bills on time, reducing debt balances, and maintaining good credit habits consistently over time. Remember, a strong credit score is crucial for securing favorable mortgage terms and achieving your homeownership dreams.

By understanding the credit score used for mortgages and taking actionable steps to improve your score, you'll increase your chances of obtaining the best possible mortgage terms and rates.