Here’s what lenders look for when deciding if you qualify for a mortgage.
Did you know that you have more than one credit score? Considering this, you may be wondering which credit score is considered by a lender when you apply for a mortgage. Let’s take a look…
It all starts with your FICO score. You may actually have up to three of these — one from each of the major credit bureaus (Equifax, Experian, and Transunion). You might see this used interchangeably with the term “credit score.”
Yes, your FICO score is a credit score — but you can technically obtain credit reports elsewhere. FICO just means it’s developed by the Fair Isaac Corporation (FICO). The majority of mortgage lenders use this because it is a nationally-recognized, reliable source.
Credit scores range from 300 to 850; the higher the number, the better your credit. Each of your credit scores is based on the information the credit bureau keeps on your file. This includes things like:
- Payment history (Do you pay your bills on time?)
- Amounts owed (Do you have a high amount of debt?)
- Length of credit history (How long have you been an active credit user?)
- Credit mix (Your variety of credit accounts, such as credit cards, installment loans, mortgages, student loans, finance company accounts, etc.)
- New credit (Did you recently open a new credit card?)
Your three FICO scores will likely be similar, but will vary slightly since each credit bureau is different. Your score will also change over time based on the changes made to the factors that contribute to your score.
So, which of these FICO scores is used when getting a mortgage? That would be your representative credit score. Lenders obtain this by going through the following steps.
First, they obtain the FICO of each borrower — at least two. If two FICO scores are obtained, they simply use the lower of the two. If three are obtained, they use the middle value. If there is only one borrower, that’s it — that’s the mortgage credit score they use.
However, if there are multiple borrowers (a married couple, for instance), lenders will repeat this process for both borrowers and choose the lower of the two outcomes. The final score in the end is your representative credit score.
From there, this score is used to determine a few factors, such as interest rate and loan eligibility. Depending on the mortgage loan and the lender you choose, the minimum credit score required to obtain a mortgage will vary.
That said, having a solid credit score is supremely important. There are several ways you can improve or maintain your credit score, such as simply knowing what your credit score actually is or paying your bills on time.
However, if you have a poor or bad credit score, you may still have mortgage options — it depends on your unique situation and your overall financial picture. Likewise, if you haven’t yet had a chance to build a credit score, now is the time to start! Even with no credit history, you may qualify for certain home loans now.
Understanding your representative credit score already puts you in a better position by knowing what to expect when applying for a mortgage loan. Contact a local home loan expert in your area to learn more.
The information provided above is intended for informational purposes only and in no way constitutes legal advice or credit counseling. The Fair Isaac Corporation (FICO) is one of the largest providers of credit score-calculating software.
