Which Credit Scores Do Mortgage Lenders Use?

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Chris Bridges, Founder and CEO, VITAL Card Inc.

When an individual is ready to buy a home, the first order of business usually involves getting his personal finances in order. After all, one of the most crucial factors in a mortgage approval is your credit score. But which credit score do mortgage lenders use to qualify borrowers? 

Learn about the difference between the primary credit scoring models, the minimum score generally needed to acquire a home loan, and the type of credit score used by the three major credit bureaus: TransUnion, Equifax, and Experian. 

What Are the Different Types of Credit Scores?

Lenders often evaluate borrowers based on three main types of credit scores: FICO, VantageScore, and industry-specific scores, such as when assessing an applicant for an auto loan or credit card

Each score can fluctuate based on multiple factors, including an individual’s payment history, length of credit history, current debts, credit utilization, and credit mix, or how many forms of credit they have. In addition, whether or not they have opened new credit lines could also influence their score due to hard inquiries appearing on their credit report.  

Among the most widely used credit scores, FICO Scores emerged in 1989 on account of the data analytics firm Fair Isaac Corporation (FICO). This popular credit scoring model includes various versions, from the recently developed FICO Score 10 to the commonly used FICO Scores 8 and 9. 

The primary score range for FICO Scores starts from 300 to 850, though other versions for particular industries may span from 250 to 900, according to myFICO. 

Likewise, the latest version of VantageScore, a credit scoring model initially developed in 2006 by the three credit reporting agencies — Equifax, Experian, and TransUnion — extends from 300 to 850. 

This was not always the case, however. VantageScore 1.0 and 2.0 began with a score range of 501 to 990. Then, more than a decade later, in 2017, the fourth and most recent version of VantageScore became available for lenders to use.

What Is the Difference Between VantageScore and FICO?

Though today the two credit scoring models share the same basic range, VantageScore has greater leeway regarding what creditors consider a good credit score, with a good VantageScore ranging between 661 and 780. On the other hand, a good credit score for FICO Scores is anything between the 670 and 739 range. 

When it comes to scoring requirements, to acquire a FICO Score, borrowers need to hold at least one active line of credit for a minimum of six months. VantageScore has fewer restrictions regarding the credit account age. This scoring model will assess an individual’s score less than a month after she opens her first credit line.

The two credit scoring models also differ in how they weight the factors that together determine a borrower’s credit score. For example, whether a credit cardholder pays his monthly statement in full or makes only the minimum payment is significant in the VantageScore 4.0 credit scoring model, unlike most FICO credit scores. 

Which Credit Score Do Mortgage Lenders Use for Home Loans?

Mortgage lenders typically use FICO Scores when considering a home loan application. For mortgages, each credit bureau refers to a different FICO Score in generating its credit report:

  • Equifax uses FICO Score 5, also called the Equifax Beacon 5.0.
  • TransUnion uses FICO Score 4, or the TransUnion FICO Risk Score 04.
  • Experian uses FICO Score 2 or the Experian/Fair Isaac Risk Model V2.

In general, creditors may pull your credit report from all three major credit reporting bureaus, then take the middle score or median to evaluate a borrower’s eligibility for a mortgage. For instance, if you have a credit score of 780, 740, and 700 across the credit reporting agencies, then your middle score would be 740.

What Is the Minimum Credit Score To Buy a House?

The answer depends on the type of loan for which the borrower is seeking approval. From conventional loans to Federal Housing Administration (FHA) loans, different mortgage loans have their own minimum credit score requirements and guidelines for creditworthiness.

These can include:

  • Conventional loans: As the name implies, these loans are the most common among homebuyers, typically accepting credit scores of 620 and above. Traditional banks and financial institutions like credit unions and mortgage companies often issue this type of loan. 
  • Freddie Mac or Fannie Mae loans: Designed to promote affordable homeownership, mortgages through these federally backed organizations require a down payment of at least three percent. The minimum FICO Score to qualify for either home loan is 620, though Fannie Mae typically calls for a score of 640 for mortgages with an adjustable rate.
  • FHA loans: For an FHA loan, applicants must carry a credit score of at least 500 when putting down 10 percent of the home’s purchase price. With a FICO Score of 580 or higher, a borrower may qualify for a mortgage with a lower down payment of only 3.5 percent.
  • VA loans: Veterans and active-duty military service members and their spouses are eligible for this loan through the US Department of Veterans Affairs, which has no set credit score requirement. 
  • Jumbo loans: These loans apply to properties that cost around $720,000 or more, with borrowers usually carrying a credit score of 700-plus. 

As a result, the minimum credit score to buy a house varies depending on the type of mortgage you’re seeking and the lender you’re working with, whether it’s a bank or VA lender. Additionally, borrowers with a bad credit score could still be able to obtain a loan, but they may be required to provide a relatively larger down payment or pay a higher mortgage rate.

What Factors Do Mortgage Lenders Consider for Home Loan Applicants?

Your credit score is just one factor that lenders will look at when deciding if they will approve your loan application. Creditors may also consider other considerations in their lending decisions, including employment histories, gross income, and debts, such as personal loans or student loans. 

Gross income is your total pay before taxes and other deductions are taken out, while net income is your take-home pay after all deductions. Mortgage lenders will typically use your gross income to determine creditworthiness.

Financial institutions prefer loan applicants with a good credit score, steady income, and a job history spanning at least two years. This is because these individuals are more likely to be able to make monthly loan payments in full and on time. 

They may also ask for documentation of your income, including tax returns or pay stubs. If you are self-employed, lenders may request that you provide additional documentation, such as bank statements or profit and loss statements. 

Can Improving Your Credit Increase Your Ability To Get a Mortgage?

Your credit score is one of the many factors that lenders consider. Even if your credit score is on the lower end, you can still take steps to improve it before applying for a home loan. 

This may include disputing any errors on your credit report or paying down debts to decrease your debt-to-income ratio (DTI), which lenders use to decide if a borrower is eligible for a mortgage and their total loan amount. 

To calculate your DTI, add up all your monthly debt payments and divide them by your gross monthly income. For example, if your debt payments amount to $2,000 monthly, and your gross income totals $4,000, your DTI would be 50 percent. 

Generally, most lenders want a DTI of 36 percent or less for conventional loans. It could also help to find a reputable real estate agent who can help you find properties that fit your budget and financial situation.

In addition, a larger down payment than the minimum — which can start as low as three percent, depending on the lender — tends to show that you have the financial resources to make a significant investment in your home. This may potentially lower your monthly mortgage payments as well.

The Bottom Line on Mortgage Lenders and Credit Scores

So, which credit score do mortgage lenders use? Your median FICO Score is one of the most critical factors that creditors will consider when you apply for a mortgage. 

A good credit score usually indicates that you’re a low-risk borrower who is responsible and likely to repay your loan on time. It can also help you qualify for a lower interest rate, which may save you money over the life of your loan.

Other financial factors, such as your income level and job history, may influence your chances of approval. Regardless, it is always a good idea to do your due diligence and compare different creditors and their mortgage repayment terms before making a final decision.

Sources:

FICO Score 8 and Why There Are Multiple Versions of FICO Score s| myFICO 

What’s the Maximum FICO® Score You Can Get? | myFICO 

VantageScore Solutions Debuts VantageScore 4.0 Credit Scoring Model | VantageScore 

What Is a Good Credit Score? | Experian 

How Long Does It Take to Get a Credit Score? | Experian 

Which Credit Scores Do Mortgage Lenders Use? | Experian 

Here’s everything you need to know about your VantageScore credit score, plus how to check it | CNBC 

What is a jumbo loan? | Consumer Financial Protection Bureau

What is a debt-to-income ratio? | Consumer Financial Protection Bureau 

Debt-to-Income Ratio | Experian 

Determine your down payment | Consumer Financial Protection Bureau

Your Job History Plays a Big Part In a Mortgage Application. Here’s What Lenders Are Looking For | TIME 

What Is a VantageScore Credit Score? | Experian 

What Is a Conventional Loan? | Experian 

B3-5.1-01, General Requirements for Credit Scores (10/05/2022) | Fannie MaeSection A. Borrower Eligibility Requirements Overview | HUD

VITAL Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.

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