What Credit Score Do Mortgage Lenders Use?

Introduction

When it comes to buying a home, your credit score is one of the most crucial factors that lenders consider. A good credit score can open doors to better mortgage rates and loan terms, while a poor score can make it challenging to secure financing or result in higher interest rates and costs. But what credit score do mortgage lenders actually use? Let's dive into this topic and explore how you can position yourself for the best possible outcome.

Understanding Credit Scores

Before we delve into the specifics of what credit score mortgage lenders use, it's essential to understand the different types of credit scores available. The two most widely used credit scoring models are:

1. FICO Score: Developed by the Fair Isaac Corporation, FICO scores range from 300 to 850. A higher score indicates lower credit risk.
2. VantageScore: Created by the three major credit bureaus (Experian, Equifax, and TransUnion), VantageScore ranges from 300 to 850, similar to FICO scores.

While both scoring models use similar credit data, they employ different algorithms and weightings, resulting in variations in your scores.

The Credit Score Mortgage Lenders Use

Most mortgage lenders rely on FICO scores when evaluating your creditworthiness for a home loan. Specifically, they typically use the middle score from the three major credit bureaus (Experian, Equifax, and TransUnion). If you have scores from two bureaus, the lower score is used. If you only have one bureau score, that score is used.

FICO scores are industry-specific, meaning there are different versions of the FICO score tailored to various lending products, including mortgages. The most common FICO score used by mortgage lenders is the FICO Score 8, which is the newest version as of this writing.

Credit Score Ranges for Mortgage Approval

While credit score requirements can vary among lenders and loan programs, here's a general overview of the credit score ranges mortgage lenders typically consider:

• Excellent Credit (760+): With an excellent credit score, you'll likely qualify for the best mortgage rates and terms.
• Good Credit (700-759): You should have access to competitive rates and loan options, but not necessarily the best available.
• Fair Credit (620-699): You may still qualify for a mortgage, but you'll likely face higher interest rates and stricter underwriting guidelines.
• Poor Credit (619 or below): It will be challenging to obtain a conventional mortgage with a poor credit score. You may need to explore alternative lending options or work on improving your credit first.

Improving Your Credit Score for a Mortgage

If your credit score falls short of the desired range for the best mortgage rates and terms, don't despair! There are steps you can take to improve your credit score before applying for a home loan:

1. Review your credit reports: Obtain copies of your credit reports from the three major bureaus and check for any errors or inaccuracies. Dispute any mistakes with the appropriate credit bureau to ensure your reports are accurate.

2. Pay bills on time: Payment history is the most significant factor influencing your credit score. Make sure to pay all your bills (credit cards, loans, utilities, etc.) on time, every time.

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

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 score. Only apply for credit when necessary.

5. Increase credit limits: Requesting a credit limit increase from your existing credit card issuers can improve your credit utilization ratio without increasing your debt.

6. Be patient: Credit scores take time to improve, so be consistent with good credit habits, and your score should gradually rise over time.

Conclusion

When it comes to securing a mortgage, your credit score plays a pivotal role. Most mortgage lenders use FICO scores, specifically the middle score from the three major credit bureaus, to assess your creditworthiness. By understanding the credit score ranges and taking proactive steps to improve your score, you can increase your chances of qualifying for the best mortgage rates and terms available.

Remember, a strong credit score is not only essential for securing a home loan but also for managing your overall financial health. By maintaining good credit habits and monitoring your credit reports regularly, you can position yourself for success in achieving your homeownership goals and financial aspirations.