What credit score do mortgage lenders use?

Credit scores help determine whether you can qualify for a mortgage and influence the interest rate you receive. But there are at least 20 different credit score versions in broad use across three major bureaus: Equifax^®, Experian^™, and TransUnion^®. Which credit score do home lenders use? Good question. Before we get there, let’s lay the foundation.

What are FICO^® Scores?

FICO^® Scores were developed by the Fair Isaac Corporation in 1989. They use information from the three major credit bureaus to evaluate a person’s creditworthiness. The score is influenced by your employment history and debt-to-income ratio. This data becomes a three-digit number ranging from 300 – 850. The higher your score, the better because a lender may see you as a good risk and offer you better rates. According to the company, over 90% of lenders use FICO^® Scores in their lending decisions.

FICO^® Score models that mortgage lenders use

The credit bureaus each use their own flavor of the FICO^® Score. Whether you want a conventional loan or another type, your credit score still will influence the terms of your mortgage. Although the numbers are different, it may not mean that higher numbers are better. Each formula just weights certain variables for creditworthiness differently. No one outside of the credit bureaus themselves knows the exact specifics of the formula, but there are general guidelines.

Here are the specific formulas for each credit bureau that are used by mortgage lenders:

• Equifax^® Beacon^® 5.0 or FICO^® Score 5
• Experian™/Fair Isaac Risk Model V2℠ or FICO^® Score 2
• TransUnion^® FICO^® Risk Score, Classic 04 or FICO^® Score 4

Factors that affect your FICO^® Score

While the specifics of various versions of the FICO^® Score are a bit of a black box, the company makes some general weighting information available:

• Payment history (~35%): This is simply about whether you’ve made your payments on time in the past.
• Amounts owed (~30%): A big portion of your credit score deals with the amount of debt you have outstanding on your credit report when compared to your credit limits. This is called your credit utilization ratio. It’s calculated by dividing the amount of credit you’re using by the total amount of credit available to you. Ideally, it shouldn’t be more than 30% each month.
• Length of credit history (~15%): The longer your credit history, the better your credit score tends to be if you’ve maintained good habits. A long-term credit history gives lenders more to go from when determining how creditworthy you are.
• Credit mix (~10%): This is a relatively small factor, but if you have both installment loans and revolving accounts like credit cards, this signals to lenders that you can effectively manage different types of credit.
• New credit (~10%): Taking on a bunch of new credit or loans at once could signal to lenders that you may have stretched yourself thin financially based on needing a lot of new credit or funds at once. But you credit score tends to go back up fairly quickly if you continue to make on-time payments and maintain other good habits.

How do lenders choose what credit score to use?

Your credit score is important in determining whether you qualify for a mortgage. 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 two median scores.

If lenders only get scores from two bureaus, it’s the lower score that counts. This happens rarely, but if you only have one credit score, that’s what’s used to qualify.

What is a tri-merge report?

Mortgage lenders typically get a tri-merge credit report that contains everything each of the three major bureaus has on your credit history, along with three FICO^® 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 the most complete 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 the record for 7 or 10 years, depending on what it is.

An example of how mortgage lenders determine your credit score

Let’s take a look at a practical example to give you an idea of how a lender selects a qualifying credit score. Let’s say you’re applying by yourself and have a score from each of the three bureaus:

• Experian™/Fair Isaac Risk Model V2℠: 765
• TransUnion^® FICO^® Risk Score, Classic 04: 789
• Equifax^® Beacon^® 5.0: 775

In this case, the median credit score is 775. If you were to apply with a co-borrower, they would likely take the lowest median. The exception is Fannie Mae where they take the average median score. If there are only two scores for a borrower, the lower score counts.

What is a good credit score to buy a house?

FAQ

These are some of the most common questions about which credit scores mortgage lenders use.

Do all mortgage lenders use the same credit score?

The major mortgage investors like Fannie Mae, Freddie Mac, FHA, and VA have standardized credit score requirements, but not all loans are sold to these institutions. Lenders may use different credit score standards for offerings they hold themselves or sell in different markets.

What do lenders consider a “good” credit score?

For all but the highest loan amounts, a credit score of 780 or better will get you the best rates. However, you can typically get an FHA or VA loan with a qualifying credit score of 580 or better as long as your DTI is low enough.

If my credit score is different with all three credit bureaus, which score do lenders use?

If you’re applying by yourself, it’s the middle score. If there are two or more borrowers, it’s generally the lowest median score. Fannie Mae typically averages the median scores when there’s more than one borrower.

What FICO^® Score do mortgage lenders use?

The major mortgage investors typically use the Equifax^® Beacon^® 5.0, Experian™/Fair Isaac Risk Model V2℠, and TransUnion^® FICO^® Risk Score, Classic 04. They may have different scores they use for loans sold to smaller investors or keep for themselves.

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

It’s important not to get caught up in which credit scores are used. The formulas and weights may be slightly different, but the fact that the median score is the one that usually counts means that you’re getting a more complete picture that takes out the highs and lows. The important thing is that you maintain good credit habits like paying on time and maintaining relatively low credit utilization to have the best credit score possible.

If you’re confident in your credit score and are ready to buy a house or refinance your current one, apply for your mortgage approval today!