The Scores That Matter in Mortgage Lending
Mortgage lenders often rely on your credit score to assess financial risk associated with you, and a good score can unlock favorable interest rates. Whether you’re looking to gauge your loan eligibility, interest rates, or mortgage terms, you will need to know a little about the various credit scores [lenders may use to] measure credit risk. Learn more about the FICO Scores typically used in mortgage lending, including score requirements and how to prepare before applying for a mortgage.
What FICO Score is needed to qualify for a mortgage?
There's no magic number that will unlock a mortgage for you. Different types of loans may have different credit score requirements.
How to check your credit score for mortgage readiness
Your credit report is also an important factor that can affect whether you get approved for a mortgage. A credit report outlines your credit history in detail, letting you know what gaps may be holding your score back. It lays out your credit history, including:
- Payment history – Past due accounts, collections, and bankruptcies.
- Amounts owed – Your account balances.
- Length of credit history – How long you've had credit accounts.
- New credit – Recent credit applications and new accounts.
- Types of credit used – The mix of credit cards, installment loans, and other credit.
One of the most important things you can do when you receive your credit report is to review it for errors or negative marks that could be dragging down your score. Make sure your name, address, and Social Security number are accurate. Additionally, even one missed payment can negatively impact your score, along with unpaid debts and bankruptcies, so always check to ensure your reporting is correct.
Which credit score is used for mortgage loans?
90% of top lenders use FICO® Scores, though some may also use other scoring models. Although the FHFA announced it will be moving to the FICO Score 10T model for mortgages in the future, for now, mortgage lenders typically use older scoring models. These are often FICO® Score 2, FICO® Score 4, or FICO® Score 5.
When lenders pull your credit score, they’ll typically pull a tri-merge report that combines credit reports from the three bureaus (Equifax, Experian, TransUnion) and then extract the median score to determine eligibility. A higher score can lead to better interest rates and more favorable loan terms.
How to optimize your credit score for a mortgage
To optimize your credit score in preparation for a mortgage application, some steps you can take include paying your bills on time and as agreed, lowering your credit utilization ratio by paying off debts, and avoiding new hard credit inquiries in the time leading up to your mortgage application. You should also correct any errors on your credit report. Taking these steps can optimize your score and may increase your chances of approval and getting favorable interest rates.
Understanding your FICO Score and taking steps to optimize it before applying for a mortgage can significantly impact your loan approval chances and the interest rates you'll receive. By checking your credit report for errors, maintaining good payment habits, and working to improve your overall credit profile, you'll be better positioned to secure favorable mortgage terms that can save you thousands of dollars over the life of your loan.
