When you’re in the market to buy a new home, your credit score plays a large part in how much money you receive from lenders. With over 16 models in use, it’s important to understand which score mortgage lenders use to determine if you qualify for a loan.
Before you jump into your new home search, let’s look at which scores are used for mortgage qualification, what they mean, and how to balance your credit mix for your best possible FICO score.
The Role of Credit Scores in Mortgage Qualification
Your credit score is a 3-digit number that mortgage lenders use to determine your creditworthiness as a borrower. Credit scores for a mortgage application range from 300-850. A higher credit score tells lenders that you’re more likely to make on-time loan payments and repay your loan. It shows you’re a trustworthy buyer and a low risk for lending. However, a low credit score may indicate that you make late payments and are, therefore, a higher lending risk.
The impact of a credit score on your mortgage is shown in your mortgage terms and interest rate. A good credit score affects your interest rate and may save you tens of thousands of dollars over the life of your mortgage. You can also qualify for a lower down payment, reduced fees, and pay off your mortgage sooner.
Different Credit Scoring Models
There are two main credit scoring models: the FICO score and VantageScore. Both credit scoring models measure the same data, but they weigh the information differently in your total credit score. For FICO, the most influential factor is your payment history. VantageScore, however, is most influenced by credit card balances and the credit utilization ratio.
Different variations are used in industry-specific cases to determine a consumer’s creditworthiness. FICO 2, 4, and 5 are generally used for mortgages, while FICO 8 and 9 are used for auto loans, credit cards, and personal and student loans.
VantageScore has 4 variations and uses trending data to track changes in your credit card usage over time.
FICO Scores: The Industry Standard
FICO scores were created in 1989 by the Fair Isaac Corporation, a data analytics company, and are used by 90% of lenders. They are a credit scoring model based on your history of making timely payments, types of credit, length of credit history, and amounts owed. FICO scores are designed to make fair, unbiased lending decisions based on data instead of personal decisions.
The Importance of FICO Scores for Mortgages
Mortgage lenders adopted FICO scores from three major credit bureaus because they often sell loans to government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. It’s easier to ensure they can sell conventional loans when most mortgage lenders use the same criteria as the GSEs.
Specific FICO Scores Used by Lenders
Major credit bureaus Experian, TransUnion, and Equifax use multiple versions of FICO scores. The number continues to increase as data becomes more effective in determining creditworthiness.
FICO Scores 2, 4, and 5 are common during the mortgage application process, while general lending, such as credit cards, auto lending, personal loans, and student loans, uses FICO Score 8. The newer FICO Score 9 also includes on-time rental payments as a factor in its credit scoring model.
Understanding the Differences Between FICO Scores
While a base FICO score like FICO 8 is most common for lending decisions, mortgage lenders focus on FICO 2 (Experian), FICO 4 (TransUnion), and FICO 5 (Equifax). Each credit bureau slightly varies in how it weighs the same factors for the FICO score. The exact weighting is unknown, but your credit score is determined by your payment history, the number of accounts under your name, the total amount owed, your credit history length, any recently opened credit accounts, and the type of credit.
Industry-Specific FICO Scores
Lenders in industries such as mortgages, auto loans, credit cards, and student loans use different FICO scores to measure credit usage.
FICO Score 5: The Primary Mortgage Score
Mortgage lenders most often pull FICO Score 5 from credit bureau Equifax. FICO Score 5 is the most strict about unpaid collection accounts. It also looks at financial obligations such as loans and medical accounts, employment history, and residential history.
Other Industry-Specific FICO Scores
Lenders also use FICO Score 2 (Experian/Fair Isaac Risk Model v2) and FICO Score 4 (TransUnion FICO Risk Score 04) to determine creditworthiness. While FICO credit score 5 is the preferred data set, mortgage lenders typically look at all three credit reports to better understand your credit use.
Other Credit Scores in Mortgage Lending
FICO scores are the most common for loan lending, but upcoming changes by the Federal Housing Administration mean lenders will include VantageScore 4.0 in future reports.
VantageScore
Founded in 2006 by the three bureaus as an alternative to FICO, VantageScore allows more people to build credit, including immigrants and college students. It provides a credit score within just one to two months of opening an account, while FICO requires six months of credit history.
FICO and VantageScore have different scoring models, but they have a similar scoring range and factors to determine a user’s credit score. For both, payment history and credit utilization are extremely important. In the FICO score reports, missing payments will most negatively affect your credit score. VantageScore also puts weight on card balances, total usage, and available credit.
Industry-Specific VantageScore Models
There are currently 4 models of VantageScore. VantageScore 3 focuses on your total account balance and is often used by credit card issuers to determine your creditworthiness and credit limit. CreditKarma uses VantageScore 3.0 when you request a free report from them.
VantageScore 4.0 is the newest scoring model and reportedly outperforms earlier ones because it looks at data over time rather than a one-time snapshot. Major credit card companies are adopting this scoring model, and the Federal Housing Administration (FHA) will require VantageScore 4 in addition to basic FICO Scores in the future.
How Lenders Use Multiple Credit Scores
During the application process, most lenders pull reports from all three bureaus in a tri-merge report. However, they will only use one score to make their final determination. The decision is easy if all three reports show the same credit scores. But if they’re different, the lender will use the mean (middle) of the three scores. When two out of the three are identical scores, mortgage lenders use that score regardless of whether it’s lower or higher than the third score.
Additional Factors Affecting Mortgage Applications
Your score isn’t the only thing that affects your application and terms. Let’s take a look at what else you need to consider when you’re applying for a mortgage.
Credit Reports
When a borrower applies for a loan, mortgage lenders require a minimum credit score of 580 for an FHA loan or 620 for a conventional loan. Pull your free credit report to find out your credit score, ensure the information is correct, and be aware of any debt collections, open applications, or disputes on your established credit history that could affect your chances.
Debt-To-Income Ratio (DTI)
A low DTI indicates that the potential borrower has a higher income than debt and is statistically more likely to make their mortgage payments since they can afford it. On the other hand, a high DTI indicates that the borrower has a lot of debt compared to their income and may have trouble paying off their loan. Lenders verify your income by using employment history, tax returns, and pay stubs.
Down Payment
Mortgage lenders view a larger down payment favorably because it lowers the total home loan a borrower must repay. Lenders use the loan-to-value ratio (LTV), which compares the amount of the potential loan to the value of the property. An LTV of 80% or less is ideal as it helps secure a loan, reduces interest payments and can determine mortgage terms favorably for the borrower.
While you generally only need a down payment of 3% to 5% to secure a loan, offering 20% can eliminate private mortgage insurance and give you a better chance of being approved. However, this can be a significant challenge for many borrowers, especially those struggling with debt. As LGBTQ+ borrowers have an average of $35,000 more in student loan debt than their cisgender or heterosexual peers, they may not be able to save up for this initial cost.
Black households also have 50% more debt than their white peers, causing significant issues for them in the long run.
Fortunately, there are programs to help with these upfront expenses. Pride Lending can help you access local, state, and national down payment assistance programs that make homeownership more accessible. We can also match you to programs that have a lower down payment requirement, helping you build equity and wealth.
How to Improve Your Credit Score for a Mortgage
Unfortunately, certain demographics experience difficulties when it comes to their reports. For example, LGBTQ+ borrowers are more likely to report a lower score, and they also carry more debt than their peers due to discrimination. In a survey, 53% of LGBTQ+ respondents stated that they had a score lower than 700 compared to 40% of other respondents.
Borrowers of color also have lower scores than their white peers. For example, Native American borrowers have an average score of 612 compared to the typical score of 727 for white people. Black people have a typical score of 627 - a shocking 100 points lower than white borrowers.
This, in conjunction with race and identity-based discrimination, can make it a challenge for certain groups to purchase homes. Mortgage brokers like Pride Lending can help provide you with essential support during the process of purchasing your home and help prevent discrimination against you.
If your report shows a median score that doesn’t meet the minimum score for either an FHA loan or a conventional loan, it’s not the end of your homeownership dreams. It will take some work and a long-term strategy, but improving your credit score can be done through these important steps.
Pay Bills on Time
The greatest factor in your median score is paying your bills on time. Even one missed payment can negatively affect your total score. Set up automatic payments if needed, even for accounts that are not reported to credit bureaus.
Reduce Credit Card Debt
Even if you have a wide mix that affects your score, focus on keeping your card usage low and try to zero out your balance at the end of every billing cycle. Reducing your utilization ratio reflects very well on the different scoring models.
Avoid Opening New Credit Accounts
Keep old accounts open, but avoid opening new ones, especially in the months leading up to applying for a mortgage. Old accounts will maintain your established history and increase the average account age. New accounts alter your debt-to-income ratio, make you look risky to lenders, and temporarily lower your score.
Monitor Your Credit Through Credit Bureaus
To monitor your usage, maintain your score, and catch potential fraud, request free reports from Experian, Equifax, and TransUnion. Consumers can access these reports and sign up for alerts when changes occur. Check your reports once a week without negatively affecting your score.
Seek Professional Guidance from a Mortgage Lender
Finally, contact Pride Lending and speak with one of our knowledgeable lenders. We’ll look at your report, discuss your financial goals, and help you make a plan to find the home of your dreams.
Conclusion
Although it’s difficult to answer exactly which score lenders use, most lenders will include your score reports from all three bureaus during the application process.
Pride Lending is here to serve as your advocate in the homebuying process, ensuring that everyone has access to the financing they need to succeed. Our team includes allies and members of marginalized communities, including LGBTQ+ and BIPOC individuals, who are familiar with all facets of the mortgage industry. We’re here to help everyone, regardless of their background or identity.
With Pride Lending, you’ll receive helpful advice about every aspect of accessing mortgage loans. We’ll search for down payment assistance programs on the local, state, and national levels that will improve your chances of success, as well as help you compare different lender requirements to ensure a stress-free application process.
Whether you’re simply thinking about a new home or you’re ready to start the process, reach out to our team today to achieve your financial and homeownership goals!
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