What credit score do mortgage lenders use?

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what credit score do mortgage lenders use

As you begin shopping for homes, you also need financing to pay for your new house. Because the majority of Americans are not paying cash for real estate, understanding the mortgage application and the lending process is critical. 

Finding the perfect home could take months, but you don’t have that kind of time to find a mortgage. Use these tips to get pre-approved for a mortgage so real estate agents know you can afford the homes they’ve shown you.

What credit score is most common?

The mortgage industry prefers to use your FICO or VantageScore when evaluating your application. What are these scores? They carefully calculate your risk level as it relates to a massive loan like a mortgage.

Did you know that the Federal Housing Finance Agency has published guidelines dictating the scores to be used for conventional loans backed by Fannie Mae and Freddie Mac? Moreover, loans backed by the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA), and the Veterans Administration (VA) have rules of their own (which we will discuss momentarily.)

Currently, the FHFA recommends:

  • FICO Score 2 Through Experian
  • FICO Score 5 Through Equifax
  • FICO Score 4 Through TransUnion

Want to check your FICO scores? Go to myFICO.com (it’s a paid service) to learn more, but remember that credit scores are always changing, and there’s no way to know which score your lender will use unless you ask directly.

What’s the minimum credit score needed for a mortgage?

The COVID-19 pandemic threw the real estate industry into overdrive. Buyers were paying 10, 20, 30, 40% percent premiums on homes just to get to contract—often without an inspection. The mortgage lending industry, then, changed how it evaluates applicants, looking for higher credit scores when approving home loans.

While the minimum score needed to qualify for an FHA-backed mortgage was once 580, that score has risen dramatically among lenders offering these loans. If you were to find a bank offering mortgages with a credit score of 580, the terms and interest may not be favorable.

Currently, minimum credit scores needed for mortgages include:

  • FHA: 580, but user experience shows that most banks are seeking borrowers with scores around 640
  • VA: None. However, lenders are to carefully review all loan documentation before approving the application.
  • USDA: There is no minimum credit score requirement, but lenders are generally looking for scores around 640.
  • Conventional: Loans backed by Fannie Mae and Freddie Mac generally require a credit score of 620.

Preparing for a home loan

You cannot prepare for a home loan unless you have spoken with a mortgage broker. Start the process by asking a broker to review your credit without impacting your credit score. A simple review of this documentation will let you know if you qualify today. If not, mortgage lenders can use predictors to help you pay off debt and raise your score as quickly as possible.

Remember, following the advice of a mortgage lender does not guarantee that your credit score will rise to the exact number you need in the timeframe you have chosen. Credit scores are fluid, and you should be patient during this process. If you want to start working on your credit today, you should do the following things.

Pay down debt

Reduce your credit utilization to somewhere below 30%, the ideal level for most mortgage lenders.

 Dispute incorrect data

Reach out to the credit bureaus and dispute information on your credit report that is factually incorrect. 

Additionally, lenders are looking at the age of your accounts, payment history, and credit mix. Yes, carrying diverse forms of credit from cards to personal loans and lines of credit can improve your score. 

Get on top of your credit score today 

If you’re ready to shop for a house, remember that you should ask your mortgage broker as many questions as possible. A good mortgage broker will let you know how to get approved quickly. If you cannot find all the information you need on a particular broker, consider another that makes the application and approval process as simple as possible.

Finally, only you can tailor your finances to the situation. Check your FICO score, learn which one the lender uses, save for a down payment, and get the search for your dream home on track.

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