If you are applying for a mortgage, your credit score will be a critical part of the process. You could get rejected with a credit score that is too low. And once approved, your score will determine the interest rate charged. Someone with a 620 might have to pay an interest rate that is as much as 3% higher than someone with a 740. But what credit scores do mortgage lenders actually use? The answer might surprise you.
Much Older Versions Of FICO
Fannie Mae and Freddie Mac are government-agencies that purchase the majority of mortgages originated in the country. These agencies set the rules and underwriting criteria for the loans that they purchase, including what credit scores should be used. Surprisingly, the agencies require much older versions of the FICO credit score. According to a review of the agency Selling Guides by MagnifyMoney, these are the scores that matter:
- From the Equifax credit bureau: FICO Version 5 (also called Equifax Beacon 5.0)
- From the Experian credit bureau: FICO Version 2 (also called Experian/Fair Isaac Risk Model V2SM)
- From the TransUnion credit bureau: FICO Version 4 (also called TransUnion FICO Risk Score, Classic 04)
Even though FICO has just recently introduced Version 9 of its score, most mortgage lenders will still be using a much older credit score.
Watch on Forbes:
If you get a free credit score from a website like CreditKarma, you are receiving the VantageScore. If you are getting your official FICO from your credit card company, it is most likely a much newer version of FICO. If you want to see the FICO score required by mortgage companies, you would have to buy it from myFICO.com.
If you do get a free credit score from your credit card company or CreditKarma and have an excellent credit score, chances are very high that you will also have an excellent credit mortgage score as well. You probably don't need to spend the money to purchase your mortgage scores. However, if your credit score is borderline, you might want to spend the money to see if it is better to apply now or wait until your score improves.
Which Older Version Of FICO Will Be Used?
Your credit score can vary from one credit bureau to another, because some information (either positive or negative) might not be on all of your credit reports. In addition, you might have a co-signer on the mortgage who has a different credit score. There are actually some very simple rules dictating which credit score to use.
- If the mortgage company pulls credit from two credit bureaus, the lower credit score will be used. If you have a 700 credit score on Experian and a 680 on Equifax, the 680 score would be used.
- If the mortgage company pulls credit from all three bureaus, the middle score will be used. If you have a 700 on Experian, 680 on Equifax and 660 on TransUnion, the 680 score would be used.
- If you have a co-signer, the above methodology (lower of two or middle of three scores) will be used for each applicant. The lower credit score of the two borrowers will be used.
In general, banks and mortgage companies want to use the lowest score available because it will likely have taken into account all negative information that is available. You will not be able to hide from negative information on your credit report when applying for a mortgage.
But It Isn't That Simple
Unfortunately, just knowing which FICO credit score is being used isn't enough to know if you are going to be approved. According to Timothy Mayopoulos, the Fannie Mae CEO, "some people suggest we slavishly follow FICO. That is not true. We evaluate credit data through own automated system and form our own judgments about the creditworthiness." In addition to the FICO credit score, there are a number of underwriting rules being used. The most recent addition is the use of trended data.
With trended data, lenders will have a different view of your payment history. In particular, lenders will see if you pay your credit card balance in full every month or not. People who borrow on their credit cards are, in general, viewed as much riskier than people who use their cards but pay the balance in full every month. For the first time, Fannie Mae will now be using this trended data as an overlay to the FICO score. So, if you have an excellent score (because of low utilization) but never pay your balance in full, you could find it more difficult or more expensive to get a mortgage.
How Do I Get A Good Credit Score (Regardless Of The Version)?
All of this information can seem intimidating. But my advice remains simple. Only spend on your credit card what you can afford to pay off in full and on time every month. Pay your bills on time. If you do those two things consistently over time, you will likely qualify for the best deals at any lender.
What If My Mortgage Is Not Purchased By Fannie Mae or Freddie Mac
If you are not applying for a Fannie Mae or Freddie Mac mortgage, the credit score is likely at the discretion of the lender. For example, a bank might have a Jumbo Mortgage product that will be retained on its own balance sheet. That bank will likely create its owns custom credit scoring model for underwriting. You can certainly ask your loan officer in advance what credit score the bank uses to make decisions. But it will vary.
Banks generally use some version of FICO in their underwriting decisions. However, it could be variable in the scoring model, or it could be used in a decision matrix along with a custom score or other rules.
