What Credit Score Do Mortgage Lenders Use?

Introduction

Buying a home is a significant financial commitment, and your credit score plays a crucial role in determining your eligibility for a mortgage loan. Mortgage lenders use credit scores to assess your creditworthiness and determine the level of risk involved in lending you money. In this article, we'll explore the types of credit scores mortgage lenders use, the importance of credit scores in the mortgage application process, and provide practical tips to improve your credit score.

The Credit Scores Mortgage Lenders Use

When it comes to mortgage lending, the two most commonly used credit scoring models are the FICO score and the VantageScore. Let's take a closer look at each of them.

FICO Score

The FICO score, developed by the Fair Isaac Corporation, is the most widely used credit scoring model in the mortgage industry. Lenders rely heavily on FICO scores to evaluate the risk of lending to potential borrowers. FICO scores range from 300 to 850, with higher scores indicating a lower risk of default.

Mortgage lenders typically use the following FICO score ranges to evaluate borrowers:

  • 760 and above: Excellent credit
  • 700-759: Good credit
  • 680-699: Fair credit
  • 620-679: Poor credit
  • Below 620: Very poor credit

It's important to note that mortgage lenders may use different versions of the FICO score, such as the FICO Bankcard Score or the FICO Auto Score, depending on the credit bureau they pull the report from (Experian, Equifax, or TransUnion).

VantageScore

The VantageScore is another credit scoring model developed by the three major credit bureaus: Experian, Equifax, and TransUnion. It ranges from 300 to 850, similar to the FICO score. While not as widely used as FICO scores in the mortgage industry, some lenders may still consider VantageScores when evaluating borrowers.

The VantageScore ranges are slightly different from FICO scores:

  • 781-850: Excellent credit
  • 661-780: Good credit
  • 601-660: Fair credit
  • 500-600: Poor credit
  • 300-499: Very poor credit

The Importance of Credit Scores for Mortgage Lenders

Mortgage lenders use credit scores to assess the risk of lending to borrowers. A higher credit score indicates a lower risk of default, while a lower score suggests a higher risk. Lenders use credit scores, along with other factors like income, employment history, and down payment amount, to determine the interest rate and terms of the mortgage loan.

Borrowers with higher credit scores are typically offered lower interest rates and more favorable loan terms, as they are considered less risky. On the other hand, borrowers with lower credit scores may be required to pay higher interest rates, make larger down payments, or provide additional documentation to compensate for the higher risk.

How to Improve Your Credit Score for a Mortgage

If your credit score is not as high as you'd like it to be, there are several steps you can take to improve it before applying for a mortgage:

  1. Review your credit reports: Obtain copies of your credit reports from the three major credit bureaus (Experian, Equifax, and TransUnion) and review them for errors or inaccuracies. Dispute any errors with the appropriate credit bureau to have them corrected.

  2. Pay bills on time: Payment history is the most significant factor influencing your credit score. Make sure to pay all your bills on time, including credit card payments, utility bills, and loan payments.

  3. Reduce credit card balances: High credit card balances can negatively impact your credit score. Try to keep your credit card balances below 30% of your total credit limit.

  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. Avoid applying for too much new credit before applying for a mortgage.

  5. Maintain a mix of credit types: Having a diverse mix of credit types, such as revolving credit (credit cards) and installment loans (auto loans or personal loans), can positively impact your credit score.

  6. Be patient: Credit scores take time to improve, so be patient and consistent with your efforts. Depending on your situation, it may take several months or even a year to see significant improvements in your credit score.

Conclusion

When it comes to applying for a mortgage, your credit score is one of the most critical factors lenders consider. Mortgage lenders primarily use FICO scores, but some may also consider VantageScores. By understanding the credit score requirements and taking steps to improve your credit score, you can increase your chances of getting approved for a mortgage loan with favorable terms. Remember, a higher credit score not only improves your chances of approval but can also save you thousands of dollars in interest over the life of the loan.

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