If you’re preparing to buy a home, you probably know that one of the most important criteria that lenders will consider is your credit score. But are the credit scores they look at the same ones that you see as a consumer? And why is this piece of data so important to your ability to buy a home?
Learn more about the credit scores that mortgage lenders use, how they could be changing in the near future, and how you can qualify for the best home loans.
[Read: Best Mortgage Lenders]
Which Credit Score Do Mortgage Lenders Use?
The credit score used most commonly by lenders is your FICO score. Short for Fair Isaac Corp., FICO started providing consumer credit scores in 1989. As the leader in the industry, FICO credit scores are used in 90% of U.S. lending decisions.
FICO produces different scoring models for different financial products, like 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.
But mortgage lenders, specifically, may soon be relying on two new credit scoring models: FICO Score 10 T and VantageScore 4.0, which comes from the other major U.S. consumer credit scoring company, VantageScore.
Big Changes in Mortgage Lender Credit Models Ahead
In October 2022, the Federal Housing Finance Agency announced that it had selected VantageScore 4.0 and FICO 10 T to replace the scores being used in the marketplace. This was the culmination of a multi-year initiative by Fannie Mae and Freddie Mac to update the credit criteria used for mortgage eligibility. These government-sponsored enterprises, or GSEs, purchase approximately 70% of mortgages from lenders on the secondary market.
So what’s special about these scores? And what will this change mean for consumers and lenders?
FICO Score 10 T
While the most widely used FICO scores in mortgage lending have been FICO Scores 2, 4 and 5, that is expected to evolve with the rollout of FICO Score 10 T, says Julie May, vice president and general manager of B2B scores at FICO.
According to May, FICO Score 10 T incorporates trended credit bureau data, so it looks at a historical view of credit data over the previous 24 months — giving lenders more insight into how a consumer manages their credit.
FICO says the new model will increase mortgage approval rates and reduce delinquencies over the other models currently in use.
VantageScore 4.0
Like FICO Score 10 T, VantageScore 4.0 also uses trended data. “We’re able to look at folks that to this point have been forgotten or invisible to some of the traditional credit scoring models in the marketplace,” says Anthony Hutchinson, executive vice president and head of public affairs for VantageScore. That translates into approximately 33 million additional consumers being scored, he adds.
Hutchinson also points out that VantageScore 4.0 incorporates data points that aren’t used in most of the classic scoring models, like paying rent, utilities and telecommunications bills. “So if you’re making those payments on time, then that’s going to positively impact your score,” he says.
As for what’s left out, VantageScore 4.0 does not utilize medical collection data, which can be a help to the approximately one in 12 Americans carrying some type of medical debt. “Part of the rationale for that is it was not predictive of a consumer’s ability to manage and repay their debt,” says Hutchinson.
[Read: Best FHA Loans.]
How the New Credit Scores Could Impact Home Borrowers
Hutchinson says that the new scores will not only welcome more borrowers to the marketplace, but some of them may come in with higher-than-expected scores.
About one-third of consumers who previously lacked a credit history under prior models end up having scores above 620, “which means that they’re going to get a little more preferential pricing,” he says.
Without the new scoring models, these borrowers may have been limited to home loans with higher pricing or not qualified at all.
The Impact of Credit Score Model Changes on Lenders
Changing over to new scoring models isn’t as simple as flipping a switch, which is why some lenders may not jump on board right away. Transitioning could require major system updates and overhauls, which could be costly. As such, some of the larger lenders may choose to stick with legacy scores until they can see how the new models pan out.
On the other hand, the timing might be right to try something new given market conditions. “Right now with a market that seems to be contracting in terms of potential homebuyers out there, this gives them an opportunity to reach people that up to this point haven’t been touched,” Hutchinson says.
May notes that some lenders have already begun using FICO Score 10 T. “Through this early adoption, lenders are benefitting from the power of FICO Score 10 T and are enabled to make more precise lending decisions, reducing risk while responsibly expanding credit access,” May says.
When Will Lenders Have to Make the Switch?
The FHFA had set a target date of the fourth quarter of 2025 for single-family mortgages that will be bought by Fannie Mae or Freddie Mac to transition to the new FICO and VantageScore scoring models. However, that deadline is now a date to be determined. This buys lenders a bit more time.
Keep in mind that if a lender plans to keep the loan on its own books, rather than sell it on the secondary market, then it can use whichever scoring model it chooses. This directive only applies to lenders that sell to the GSEs.
Another Change: Tri-Merge to Bi-Merge
Up until now, when a mortgage lender pulled your credit, it would look at your FICO scores from each of the three credit bureaus to help determine your loan eligibility and terms. The lender would then use the middle score to evaluate your creditworthiness.
However, as part of the new guidelines from FHFA, the GSEs will now accept bi-merge credit reporting from lenders, in which credit reports from two (instead of three) of the major credit bureaus are used. The recommendation is that this transition take place in tandem with the scoring model transition.
Importance of Your Credit Score in Mortgage Approval
Regardless of which credit score is used, lenders will continue to rely on credit reports to determine an applicant’s creditworthiness. “Consumer credit reports are fundamental to the homebuying process, helping lenders more accurately assess a consumer’s likelihood of repaying a mortgage and enabling consumers to qualify for the best available mortgage rates,” says Dan Smith, President and CEO of the Consumer Data Industry Association, which represents the consumer reporting agencies.
“The reliable information our industry provides to financial institutions, employers, and service providers ultimately helps open up and provide more opportunities for consumers and manages risk to the mortgage ecosystem.”
Tips To Improve Your Score Before You Apply
Depending on the type of loan you’re seeking, the credit score you need to buy a house can be as low as 500 (for an FHA loan with 10% down), and conventional loans typically require at least a 620 score. But having minimum qualifying scores won’t get you the best offers.
As a homebuyer, having the highest credit scores possible can put you in the best position to not only get approved for home loans, but to receive offers with lower rates and favorable terms. Here are some steps you can take to boost your score:
— Pay on time — and watch those balances. “If you can make your payments on time and reduce your utilization, you’re going to see your score go up over time,” says Hutchinson. Even with the new models, payment history and how much debt you carry relative to your available credit will be among the most important scoring factors.
— 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. If you’re planning to apply for a mortgage in the near future, don’t apply for any new credit beforehand unless absolutely necessary. Hard inquiries will lower your credit score.
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Which Credit Score Do Mortgage Lenders Use? originally appeared on usnews.com
Update 06/26/25: This story was previously published at an earlier date and has been updated with new information.
