What Credit Score Do Mortgage Lenders Use?

Along with your income, employment, asset and debt information, mortgage lenders consider your credit score when determining if you qualify for the loan program you desire. Rather than relying on a single VantageScore or FICO credit score from one credit bureau, lenders usually pull your credit information from multiple sources and focus on the middle or lower score in the set. The credit score needed for home loan approval can depend on the lender and loan program. Generally, you'll want to have a high score to have the most financing options and avoid paying a high mortgage rate.

TL;DR (Too Long; Didn't Read)

Mortgage lenders often compute multiple FICO or VantageScore figures using credit reports from more than one bureau. They may then go with the middle number or lower number of the set.

Basics of Credit Scores

When you apply for a mortgage, lenders consider your credit score to assess whether you're a risk for a mortgage. They can obtain your credit report from three bureaus – Experian, TransUnion and Equifax. With your credit reports in hand, lenders can use credit scoring models such as the FICO credit score or VantageScore.

Both models take into account factors such as your on-time payment history, number of inquiries, type and number of accounts and length of credit history to generate a number from 300 to 850. Generally, a score of 680 or higher will indicate good credit, while a score in the upper 700s or higher would be excellent.

Depending on the bureau from which the lender pulls your residential mortgage credit report, you'll find that a FICO or VantageScore number derived from one source can differ from that of another bureau. This is due to the fact that some creditors may not report your accounts or credit pulls to all the bureaus. So, it's possible that your FICO score calculated from Experian's report is lower than the one from TransUnion's.

How Lenders Use Credit Scores

When pulling a residential mortgage credit report, lenders often look at information from multiple bureaus and calculate multiple credit scores for evaluation. They look at each applicant's credit history closely, and the scores used will ultimately determine whether to approve the mortgage and what interest rate the borrower will pay.

If you're applying alone, your lender may pull your report from all three bureaus, calculate three FICO credit scores based on the information and then go with the middle number. Your lender could also pull your reports from two bureaus and use the lower FICO credit score or VantageScore of the two.

When applying with a co-borrower, such as your spouse, the lender usually computes scores from multiple bureaus for each of you. However, in the case where you have a high score and your co-borrower has a lower one, the lender often goes with the lower score. In some cases, a couple may decide to have just one spouse on the mortgage to avoid the risk of a denied application or unfavorable loan terms when one person has poor credit.

Credit Score Needed for Home Loan

The credit score needed for a home loan depends on the mortgage program. The Lenders Network mentions you'll typically need a score of at least 620 to qualify for conventional loan programs, Veterans Affairs loans and Federal Housing Administration 203k loans, while United States Department of Agriculture rural loans will require a score of at least 640. If you've got a score between 500 and 620, you can still qualify for an FHA loan, but you'll need to make a higher down payment with a 500 credit score than with a score of 580.

It's important to note that meeting these basic scores doesn't guarantee mortgage approval, and if approved, you can expect to pay a higher interest rate than individuals with high credit scores. In August 2019, myFICO reported that someone with a 620 credit score might pay a mortgage rate of 4.92 percent, while someone with a score of 800 would pay a lower 3.33 percent.

Seeing Your Credit Score

To get an idea of what your credit score looks like, you can try free online services like Credit Sesame and Credit Karma to see your credit report from one or two of the bureaus and generate an estimated score based on the VantageScore model. To get an estimate of your FICO score instead, check with your bank or credit card company since some offer this benefit to members. For example, Discover and American Express cardholders can get free FICO scores along with customers of Bank of America, Chase and Ally Bank. However, do know that these online scores are estimates and will likely differ from what your lender calculates.

Improving Your Credit Score

If you pull your credit scores and find you won't qualify for a mortgage or would probably have to pay a high rate, it's a good idea to take steps to raise your scores. Your payment history and debt owed make up the biggest part of your score, so paying down large debts, avoiding the temptation to open more credit card accounts and avoiding late payments will help you gain points over time. You'll also want to make sure your credit reports don't have mistakes, such as incorrect accounts, and avoid closing your long-standing accounts.

To see how positive changes can improve your score, try using a credit score simulator like those you can find on the Credit Karma, TransUnion, myFICO and other banking websites. You can plug in your current score and do simulations to see how your score changes if you take actions, such as decreasing account balances, getting credit limits increased or avoiding late payments.

Understanding Other Mortgage Approval Factors

While your credit score helps determine the loan programs you qualify for and your interest rate, it is only one of several factors that ultimately determine your mortgage approval. Even if you have a great score, your lender may still deny you due to problems with your employment history, debt ratios, cash reserves or the property.

  • Employment history: Lenders usually want to see that you've had two years of steady employment since this shows some stability that you'll continue to earn your stated income. You can expect to submit documentation like W-2 forms and pay stubs as well as have the lender call your employer for verification. If you're self-employed, expect to show two years of tax returns demonstrating your self-employment income. You also have to submit documentation like bank statements, any business license, a profit-and-loss statement and possibly a letter from your accountant.
  • Debt ratios: Your front-end and back-end debt-to-income ratios will determine if you qualify for the specific loan amount you want. Investopedia notes that lenders generally want you to spend no more than 28 percent of your monthly income on your housing costs and no more than 36 percent on housing combined with other debts. However, the ratios can differ by loan program. For example, you can qualify for an FHA loan with a maximum front-end ratio of 31 percent and a top back-end ratio of 43 percent, as of 2019.
  • Cash on hand: The mortgage application process requires showing that you have enough money for your down payment in your bank account – or a gift letter if the money comes from another source – as well as enough money to pay for your closing costs. On top of those funds, you'll need to show that you have at least a few months of cash reserves that will cover your mortgage payment.
  • Property details: Besides your financial and employment profile, lenders require that your chosen property's appraisal value isn't below your loan amount. The house also needs a clean title and must meet any property condition requirements your loan program has.

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