If you have a credit card, chances are you’ve gotten a letter or email encouraging you to check your FICO credit score.
But what is this score, and where does it come from?
Depending on the types of credit you have, you likely have multiple FICO scores.
Mortgage lenders check these scores to evaluate your creditworthiness when you are looking to buy a home or refinance.
Learn why mortgage lenders look at your credit scores, how they use them, and which scores your lender may use when applying for a mortgage or refinancing.
Why do mortgage lenders look at credit scores?
In the 1980s, the top three credit reporting agencies were struggling to accurately interpret and compare credit reports.
These agencies, known today as Equifax, Experian, and TransUnion, started working with a tech company called Fair, Issac, and Company (FICO). The result of this partnership was the FICO Score, which today is used by 90% of lenders.
Credit scores are based on your credit history, which are calculated from the following factors:
- Payment history (35%)
- Total amount owed (30%)
- Length of credit history (15%)
- Types of credit (10%)
- New credit (10%)
The FICO score range helps mortgage lenders determine what type of borrower you are, based on the financial picture provided by your personal score.
For example, an excellent score is considered 800-850, while a poor score is 300-579.
Those top three credit reporting agencies also created VantageScore in 2006, which paints a slightly different credit picture that focuses more on your credit use, available credit, and credit experience.
Each of the reporting agencies generate their own FICO Score and VantageScore for consumers, based on their individual algorithms.
How do lenders use credit scores?
Mortgage lenders mainly use credit scores to evaluate whether you will be able to repay your mortgage loan.
They often will order your full credit report, which contains various scores based on the types of credit you have.
Lenders evaluate your credit score to determine which loans you can get, and the interest rates you will pay. If you have a low score, it could mean anything from paying more for a loan to not qualifying for one altogether.
When refinancing, your credit score is used in a similar way to determine the rates and terms of your new mortgage — and whether you are able to refinance at all.
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That’s why it’s important to keep your credit score in check and work closely with your lender to determine the best time to refinance.
How does credit score determine loan type?
Conventional loans require that you have a higher credit score, while Federal Housing Administration (FHA) loans are a bit more forgiving when it comes to your score.
With an excellent credit score, you can expect to pay less for your loan because your interest rate will be lower.
Not only will a poor score affect your ability to get a loan, but if you do qualify for one, you could be paying thousands of dollars extra over the life of your loan due to a higher interest rate.
How can I access my credit score?
Per the Federal Trade Commission, you can pull one free copy of your credit report from each of the three main agencies per year.
You also may have frequent access to your score for free through your bank or credit card issuer.
Keep in mind that the free score you have access to through your bank or credit card company is not your comprehensive report, but it will give you a snapshot of where you are to help you get where you want to go.
Which credit score is my lender evaluating?
Most people have multiple credit scores that are changing all the time.
These scores are industry-specific and include credit cards, auto loans, and mortgage loans.
Since FICO Scores were introduced more than 25 years ago, credit requirements and data collection practices have changed. As a result, there are multiple versions of the FICO Score models.
The most widely used version is FICO Score 8, but the most frequently used versions in mortgage lending are:
- Experian: FICO Score 2
- Equifax: FICO Score 5
- TransUnion: FICO Score 4
Industry-specific scores are fine-tuned based on the specific risks of each industry.
How to get started
If you’re ready to begin the homebuying or refinance process but are unsure about your credit situation, check with your bank or credit card issuer to get an idea of your score. You also should download your full report yearly to evaluate your history and ensure there are no errors.
Your credit history might be complicated.
To help you learn more about your situation and improve your score, consider working with your lender or a financial counselor to help you get where you need to be.
Work with a trusted mortgage loan officer
Your mortgage lender is the ideal resource for asking questions about any part of the homebuying process before you are even ready to apply.