Which FICO Score Do Mortgage Lenders Use?

Which FICO score do mortgage lenders use

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The three primary credit reporting bureaus are Equifax, Experian, and TransUnion. The primary models used in the mortgage lending industry include FICO Score 2, FICO Score 4, and FICO Score 5.

Which FICO Scores Are Taken Into Consideration When Applying for a Mortgage?

The Fair Isaac Corporation introduced its first FICO credit scoring model in 1989. Estimates today suggest that FICO scores are the most commonly used credit scores for mortgage loan approvals.

A competing model known as VantageScore also exists. Both models use a similar mix of metrics to calculate three-digit scores ranging from 300 to 850.  

The most common FICO Score models used vary among the three major credit bureaus as follows:

  • FICO Score 2, or Experian/Fair Isaac Risk Model v2
  • FICO Score 5, or Equifax Beacon 5
  • FICO Score 4, or TransUnion FICO Risk Score 04 

FICO continues creating new versions of its models. Yet, many mortgage lenders still use older versions. Many of them adopted versions years ago based on guidelines from agencies, i.e., Fannie Mae or Freddie Mac.

Created by Congress, Fannie Mae and Freddie Mac are a part of the Federal Housing Finance Agency (FHFA). In 2022, they approved the FICO 10T and VantageScore 4.0 models for use. The FHFA expects a “multiyear” adoption process in the mortgage industry.  

The new models reflect some changes in the credit reporting industry. For example, all three bureaus will now add rent and utility payments to consumer credit histories if received. 

Other Things Lenders Look At

Credit scores are one of the primary factors that influence mortgage lending decisions. But most lenders now consider a broader range of other factors too. This allows the lender a more comprehensive view when assessing risk.

Certain adverse credit report entries rarely go unnoticed by mortgage lenders. For example, a past bankruptcy filing or home foreclosure is likely a concern for lenders. Bear in mind that most negative credit report entries remain visible for seven years.

Mortgage lenders will want to know that a prospective borrower has the means of paying back a loan. Thus, they will want verifiable proof of current employment and regular income. Here, you might need to present bank statements or pay stubs.

Mortgage lenders will also consider the other debt obligations you have. One key metric that many lenders consider is a consumer’s debt-to-income (DTI) ratio. The formula for calculating this is:

DTI % = Total Monthly Debt Payments / Monthly Gross Income

While limitations might vary slightly, mortgage lenders usually prefer a DTI below 45%.

Another factor that can influence lending decisions is the loan amount. Also, the amount you have available for a down payment is often an important factor.

Impact of Your Credit Score on Your APR

A mortgage applicant’s credit score may represent the basis for a loan approval or denial. Those with good credit scores likely qualify for more favorable (lower) interest rates.

Like gas prices, mortgage interest rates fluctuate based on market conditions. A second measure used in mortgages is the annual percentage rate (APR).

The APR is a more detailed assessment of a mortgage’s costs. The APR includes the interest rate and fees, points, and other applicable charges.

Applicants with fair to average credit should expect to face higher interest rates. How does a loan’s APR influence your overall costs? The following chart reveals this impact.

FICO Loan Calculations*

Loan PrincipalFICO ScoreAPRMonthly PaymentTotal Interest Paid

Source: FICO *30-Year Fixed Rate Mortgage

As the chart reflects, your credit score will have a significant impact on the total cost of a mortgage loan.

How to Improve Your Credit Score

Consider the following possible credit score improvement methods.

Get a Credit Builder Loan

A credit builder loan is a type of installment loan. The loan funds remain in a secured deposit account.

Each month, the borrower makes a fixed monthly payment toward the balance. During the loan term, the lender reports the payment activity to the credit bureaus.

After receiving all the payments, the borrower may access the deposited loan funds.

Dispute any Errors on Your Credit Report

Consumers may receive a free copy of their credit report each year. Closely review your credit report and identify any errors.

If mistakes exist, use the website tool maintained by the credit bureau to file a dispute. This process of correcting mistakes might allow for boosting your credit score quickly. 

Experian also now offers consumers access to a free FICO Score

Check Your Credit Utilization

Another important factor involves your revolving credit accounts: your credit utilization rate. The most common revolving type of account is credit cards. 

Expressed as a percentage, the formula for calculating your credit utilization rate (CUR) is:

CUR = The total of any credit card balances / The total of all credit card account limits 

A good rule of thumb is to maintain a rate below 10%. This is another possible way of quickly boosting your credit score. How? Either pay down your balances or contact the card issuers regarding limit increases.

Avoid Hard Inquiries

Each time you apply for a new credit account, the lender will generally check your credit. 

This process generates a “hard” credit inquiry on your credit report. Hard inquiries may also result when a potential landlord or employer checks credit as part of their background screening process.

Lenders often perceive several recent hard inquiries as representing a potential problem. It might indicate that some unexpected financial calamity occurred.

Hard credit inquiries usually have a slightly negative effect on your credit score. Hard inquiries remain visible on credit reports for two years. Yet, FICO Scores only consider inquiries from the past year.

Mortgage lenders often use FICO scoring models tailored to their industry. Other sectors including automobile lending and credit cards also have industry-specific scoring models.

Your credit score may have a substantial impact on the interest rate of a mortgage loan. Over time, a rather small increase in your rate may result in paying much more for your home.

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