Do Mortgage Lenders Use FICO 8?

Introduction

If you're planning to apply for a mortgage, understanding the credit scoring models used by lenders is crucial. One question that often arises is whether mortgage lenders use the FICO 8 score, which is the latest version of the widely-used FICO credit scoring model. In this article, we'll dive deep into this topic, providing you with practical insights and actionable advice to help you navigate the mortgage lending process more effectively.

What is FICO 8?

Before we delve into the specifics of mortgage lending, let's briefly discuss what FICO 8 is. FICO 8 is the most recent version of the FICO credit scoring model, introduced in 2009. It aims to provide a more accurate and predictive assessment of an individual's creditworthiness by considering various factors, such as payment history, credit utilization, and credit mix.

One of the notable changes in FICO 8 is the way it treats collection accounts. Unlike previous versions, FICO 8 distinguishes between medical and non-medical collection accounts, giving less weight to medical collections. Additionally, it places more emphasis on newer credit information, as recent payment behavior is often a better predictor of future risk.

Do Mortgage Lenders Use FICO 8?

The short answer is: it depends. While some mortgage lenders do use FICO 8 scores, many still rely on older versions of the FICO model or even other credit scoring models altogether.

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac, the two largest mortgage buyers in the United States, currently use older versions of the FICO model for their underwriting decisions. Specifically, they rely on FICO 5, FICO 4, and FICO 2 scores, depending on the specific loan program and the applicant's credit report.

FHA Loans

For FHA (Federal Housing Administration) loans, lenders typically use FICO scores from the three major credit bureaus (Experian, Equifax, and TransUnion) and take the middle score or the lower score of the two highest scores, depending on the lender's policy.

Conventional Loans

For conventional loans (those not backed by government agencies), lenders have more flexibility in choosing the credit scoring model they prefer. Some may use FICO 8, while others may still rely on older versions or alternative models.

Lender Preferences

It's important to note that individual lenders may have their own preferences and policies regarding which credit scoring model they use. Some lenders may choose to use FICO 8 because they believe it provides a more accurate assessment of creditworthiness, while others may stick with older versions for consistency or other reasons.

How to Prepare for Your Mortgage Application

Regardless of which credit scoring model a lender uses, there are some general best practices you can follow to improve your chances of getting approved for a mortgage and securing a favorable interest rate:

1. 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 to ensure your credit reports are accurate.

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

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

4. Avoid 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 new credit cards or loans while in the mortgage application process.

5. Maintain a mix of credit types: Credit scoring models consider your mix of credit types (e.g., credit cards, mortgages, auto loans, etc.). Having a diverse credit mix can positively impact your score.

6. Be patient: Credit scoring models place more weight on your recent credit behavior. If you've had credit issues in the past, consistently responsible behavior over time can help improve your score.

Conclusion

While FICO 8 is the latest version of the FICO credit scoring model, mortgage lenders may or may not use it when evaluating your mortgage application. The specific credit scoring model used can vary depending on the lender, loan type, and other factors.

However, regardless of the credit scoring model employed, the fundamental principles of good credit management remain the same. By following best practices like paying bills on time, maintaining a low credit utilization ratio, and avoiding new credit applications during the mortgage process, you can improve your chances of getting approved for a mortgage with favorable terms.

Remember, your credit score is just one piece of the puzzle in the mortgage lending process. Lenders also consider factors such as your income, employment history, and overall financial situation. By being proactive and taking steps to improve your credit profile, you can increase your chances of achieving your homeownership dreams.