Which Credit Score Do Mortgage Lenders Use?

There’s a lot to learn and keep track of when you’re preparing to buy a home. You’ve likely spent hours looking at houses, talked with real estate agents and mortgage brokers, and saved every spare cent to come up with a down payment.

But have you checked in on your credit score, this important personal finance metric in the homebuying process?

What Is a Credit Score?

“A credit score is a numerical prediction of how likely you are to pay a loan back on time based on information from your credit reports,” said Chuck Meier, senior vice president and mortgage sales director at Sunrise Banks.

Your three-digit score factors in your:

Payment history. Consistent, on-time payments are critical to building and maintaining a high score.

Credit utilization ratio. This measures how much of your available credit you’re using. Lenders view a high utilization rate as an indication that you may be financially overextended.

Credit history length. Responsible credit management over time will help your score.

Credit mix. Lenders like to see that you can use different types of credit responsibly, such as credit cards (revolving credit) and mortgages (installment loans).

Recent credit applications. Frequently applying for new credit could indicate that you have cash flow problems and may be more likely to default.

A higher score demonstrates that you’re a lower risk to lenders, increasing your odds of credit approval, lower interest rates and favorable loan terms. On the other hand, a lower score shows that you’re a higher risk to lenders, which could mean denial of credit, higher interest rates and less favorable loan terms.

[Read: Best Mortgage Lenders]

Common Credit Score Models

The credit score used most commonly by lenders is your FICO score. Originally known as Fair, Isaac, and Company, FICO started providing consumer credit scores in 1989. As the leader in the industry, the company now generates credit scores for 90% of the top lenders in the U.S.

FICO produces different scoring models for different financial products, such as auto loans or mortgages, and they are adapted for each of the three major credit bureaus — Experian, Equifax and TransUnion. This means you have multiple FICO scores and they may vary depending on the type of loan you’re seeking.

While FICO is the dominant credit-scoring company, it has some competition. In 2006, Experian, Equifax and TransUnion collaborated to establish VantageScore, the first tri-bureau credit scoring company. All three credit bureaus get the same VantageScore credit scoring model, reducing score variation.

Your base credit score will fall between 300 and 850, regardless of which scoring model your lender uses. Financial product-specific scores from FICO may have a slightly different range.

Different Types of Credit Scores

FICO periodically updates its models as technological advancements and financial shifts demand. Currently, FICO Scores 8 and 9 are widely used among lenders. However, some financial institutions may still use an older scoring model if it works better with their existing business practices. FICO Score 10 is the latest scoring model available to lenders, and its use is gradually expanding.

VantageScore only offers a base credit scoring model. However, the company has updated its model several times since its inception. Developed in 2017, VantageScore 4.0 is the latest option available.

[Read: Best Mortgage Refinance Lenders.]

Which Credit Score Do Mortgage Lenders Use?

“Currently, the most widely used FICO Scores in mortgage lending are FICO Scores 2, 4 and 5, but that will change with the widespread adoption of FICO Score 10T in the mortgage lending industry,” says Jenelle Dito, senior director of FICO Score Open Access.

According to Dito, FICO Score 10T incorporates trended credit bureau data, so it looks at a historical view of credit data over the previous 24 months — which gives lenders more insight into how consumers are managing their credit.

FICO says the new model will increase mortgage approval rates and reduce delinquencies over the other models currently in use.

When will lenders make the switch to FICO Score 10T? The Federal Housing Finance Agency has set a target date of the fourth quarter of 2025 for single-family mortgages that will be bought by government-sponsored enterprises — such as Fannie Mae or Freddie Mac — to transition to the new FICO and VantageScore scoring models. This change will impact a significant share of the overall mortgage market.

If a lender doesn’t plan to sell the mortgage to a GSE, it can use whichever score it chooses. “Since its initial introduction to the market in 2020, we are experiencing growing adoption of FICO Score 10T outside of the conforming [GSE] market,” says Dito.

What Happens When a Lender Pulls My Credit Scores?

Mortgage lenders typically obtain FICO scores from each of the three credit bureaus to help determine your loan eligibility and terms. The lender may then use the middle score to evaluate your creditworthiness. If you apply for a home loan with a partner, the lender may consider the lower middle score of the group.

Why Lenders Prefer FICO Models

While mortgage lenders have more credit scoring options than they did 20 years ago, most still turn to various FICO models.

“For mortgages, it is not an issue of lenders preferring FICO, but rather that it is the only scoring model currently acceptable for most loan programs,” says Jennifer Beeston, senior vice president of mortgage lending at Guaranteed Rate. “There is talk of VantageScore coming in as a second player, but that has not become industry-wide at this moment.”

Importance of Your Credit Score in Mortgage Approval

Your score is just one piece of the credit puzzle, and you may not need as high of a credit score to buy a house as you think.

“I would argue that credit score is not as important as credit history,” says Beeston. “For instance, you can have a 550 credit score which is allowable with both FHA and VA loans, and the key is just that your credit history is positive, meaning no late payments within the last 12 months.”

Tips To Improve Your Score Before You Apply

It’s smart to boost your credit score before applying for a home loan. Here are some steps you can take:

Pay bills on time. “Make sure you are paying your bills on time. I cannot stress it enough. Double and triple check autopay,” says Beeston.

Don’t max out your credit. “Have credit, but don’t max out what is available. And pay it off monthly,” says Meier.

Maintain a good credit age. Don’t close old credit cards even if you no longer use them — especially if you’ve had them for a long time. This helps preserve the age of your credit history.

Avoid credit applications. Don’t apply for new credit unless absolutely necessary if you’re planning to apply for a mortgage in the near future. Hard inquiries will lower your credit score.

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Which Credit Score Do Mortgage Lenders Use? originally appeared on usnews.com

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