What credit score do mortgage lenders use?

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Most commonly, lenders are using something called “classic FICO®” to judge whether your credit score meets their standards for mortgage qualification. Now the Federal Housing Finance Agency (FHFA) and Department of Housing and Urban Development (HUD) have approved the use of FICO® 10T and VantageScore® 4.0 as credit scoring models.¹

 Rocket Mortgage is participating in a limited pilot of VantageScore® 4.0 for conforming conventional and VA loans. FICO® 10T implementation by mortgage investors will follow.

Key takeaways:

• Classic FICO® models are typically used, but the industry is moving toward more modern credit scoring models.
• The newer models use machine learning to take into account credit data over a 2-year time frame rather than a single snapshot when credit is pulled. Rent is also included.
• Regardless of the model used, maintaining good habits like paying on time, maintaining low credit utilization, and limiting new accounts can help your score.

What’s changing in credit score models?

VantageScore® 4.0 and FICO® 10T are considered modernized models. While they still take into account many of the factors traditionally used in calculating credit scores, there are several differences that have been publicly announced. Here are a couple of the big ones for housing:

• Rent history: If your landlord or property manager reports that you have a documented history of consistently making your payments, this is considered a positive for your credit.
• Trended data: Credit reports have traditionally been a snapshot in time, viewed independently of one another. Now, this will look at your payment history going back up to 24 months. As an example of how this might impact you, those who consistently carry lower balances should be considered less risky than those who often have higher ones.

Understanding credit score landscape

The two major players in credit score modeling are FICO® and VantageScore®. Together with a tri-merge credit report that pulls information from all three bureaus, the scores are part of a broader range of factors that determine not only whether you qualify but also your mortgage rate.

Although there are differences between the two companies’ models that we’ll get into, many basics are the same: Your score is influenced by key parts of your financial picture, like your payment history and debt-to-income ratio. This data is expressed as a three-digit number ranging from 300 – 850.

What is a FICO^® Score?

A FICO^® Score was developed by the Fair Isaac Corporation (FICO) in 1989. It uses information from the three major credit bureaus to evaluate a person’s creditworthiness. According to the company, over 90% of top lenders use FICO^® Scores in their lending decisions.

What is a VantageScore®?

VantageScore® started in 2006 as an independently managed, joint operating venture of the three major American credit bureaus – Equifax®, Experian®, and TransUnion®. VantageScore® says that the company has credit scoring data for 33 million people not accounted for under other credit scoring models.

What affects your credit score?

Although the basics are the same, there are variations between the two companies in terms of what goes into your credit score. Regardless of where it comes from, a credit score is the result of an equation. While the companies don’t release exactly what the equation is, we do know the variables and how they’re weighted.

In the following sections, we’ll go over the different credit scoring factors, what they mean, and how you can use this information to bring your credit score up over time.

FICO^® Score

FICO^® Scores today are calculated based on the following weights:

Here’s what each of those factors means:

• Payment history: This simply looks at whether you make at least the minimum payment on time for your existing debts.
• Amounts owed: There are several factors that go into this, including the amount you owe on all accounts, what you owe on revolving accounts like credit cards vs. installment loans, how many accounts carry a balance, your credit utilization compared to your limits, and your current balance compared to the original loan amount on installment loans.
• Length of credit history: This looks at the age of your oldest to newest accounts, along with the average account age. Along with that, it looks at how long specific accounts have been established for you and how long since you used them.
• Credit mix: This looks at the type of accounts being opened. For instance, are you using a lot of installment loans or credit cards? Do you have accounts with retailers, other lenders, or your mortgage? FICO® says it’s not necessary to worry about having one of each.
• New credit: When you get a new loan or credit card, your score typically takes a temporary dip because it could be a sign that you’re overextending yourself financially. The good news is your score will tend to go up over time if you maintain other good habits like paying on time and keeping manageable balances.

VantageScore®

Some of the VantageScore® categories will be similar, but there’s enough variance that it’s worth understanding the differences. Here’s the breakdown for VantageScore® 4.0:

Here’s an explanation of each factor:

• Payment history: Are you making your payments on time?
• Credit depth: This is a bit of a mix between the FICO® categories for length of credit history and credit mix. Within this category, VantageScore® looks at average credit account age, the age of your newest and oldest accounts, and your makeup of revolving vs. installment debt.
• Credit utilization: This is directly analogous to the “amounts owed” category in the other model. One specific tip they offer is to use no more than 30% of your overall limit on all of your revolving credit accounts.
• Recent credit: This functions similarly to new credit in the other model.
• Balances: This is based on the total balances for all of your accounts. High balances on credit accounts can impact your score, but not as much as other factors.
• Available credit: Although the impact is small, if your limits are higher on credit accounts, it sends a slightly stronger signal to future lenders that past creditors have considered you trustworthy.

Credit score models that mortgage lenders use

Although classic FICO® is most common for mortgage loans for now, even that means three different models based on the bureau:

• Equifax® Beacon^® 5.0
• Experian^®/Fair Isaac Risk Model V2
• TransUnion® FICO^® Risk Score, Classic 04

Now, lenders will also have the option of pulling VantageScore® 4.0 credit scores from each bureau. Together with the upcoming launch of FICO® 10T, lenders can begin to take advantage of the innovations in the updated models.

Lenders and mortgage investors may choose their own models based on their product requirements. You can also ask your mortgage lender which models they use.

How do lenders choose which credit score to use?

Most of the time, your score is pulled from all three bureaus. If you’re applying by yourself, lenders typically use the median score.

If you’re applying with a co-borrower, three scores are pulled for each borrower during the underwriting process, and the lowest median score between the two of them is what counts.

The exception is loans purchased by Fannie Mae, which will sometimes take the average of the median scores when multiple borrowers are involved.

What is a tri-merge report?

Mortgage lenders use a tri-merge credit report that contains everything each of the three major bureaus has on your credit history, along with three credit scores. In addition to each bureau using a slightly different credit score version, there’s no guarantee that they’ll all have the same information, so pulling all the reports together gives lenders an accurate picture of your credit history.

This report contains information about all your revolving and installment accounts and how much debt you have outstanding. Negative information reported to any of the credit bureaus stays on your record for 7 or 10 years, depending on what it is.

What is a good credit score to buy a house?

Although there’s no minimum credit score to buy a house with a confirming conventional loan backed by Fannie Mae or Freddie Mac, the two government-sponsored enterprises take into account a variety of other risk factors, many of which typically coincide with credit scoring factors.

Lenders can also set their own minimums for any of these loan options.

FAQ about credit scores and mortgage qualification

Let’s try to answer a few more questions you may have.

How does credit score affect mortgage terms?

At the most basic level, a credit score can be one of the biggest factors in determining whether you qualify. At the same time, it impacts other mortgage loan terms, like the rate you receive.

What do lenders consider a ‘good’ credit score?

Good is in the eye of the beholder, but as an example, Experian® considers anything 670 or higher to be “good.” Lenders have their own risk assessments.

Can I get a mortgage with a low credit score?

It’s possible to get a mortgage with less-than-stellar credit. Lenders may have stricter requirements, such as asking for a higher down payment or a lower DTI ratio.

Do all lenders use FICO^® Scores?

FICO® Scores are common, but they’re not the only option. VantageScore® has recently been approved for use for conforming loans. Additionally, lenders may choose their own models for loans that they hold in their own portfolio and may manually underwrite.

How many hard inquiries are too many for a mortgage?

Hard inquiries resulting from a preapproval can have a temporary negative impact on your credit. However, lenders and credit bureaus also understand that you want to shop for the best terms. If you make all of your home loan inquiries within a 14-day period, it counts as one inquiry.

The bottom line: Your credit score is a picture of your financial health

While classic FICO® models continue to be common in the market, FICO® 10T and VantageScore® 4.0 have been approved by the FHFA and HUD. VantageScore® 4.0 is live for some lenders, including Rocket Mortgage, today. Integration of FICO® 10T is coming at a later date.

Some advantages of these new models include rent history tracking and the use of machine learning to look at trends over 2 years as opposed to one-time snapshots when credit is pulled.

Regardless of the model being used, maintaining consistent credit habits like on-time payments, manageable balances, and limiting new credit to only what you need will have a positive impact on your score.

If you’re feeling confident and ready to get started, you can apply online.

¹ Rocket Mortgage is not acting on behalf of FHA or HUD.

² To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.

³ Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

⁴ Rate pricing and closing costs dependent on loan qualification requirements and factors including but not limited to credit, income, assets, down payment, product selection and loan amount. This is not a commitment to lend.

Rocket Mortgage is a trademark of Rocket Mortgage LLC or its affiliates.