When you’re applying for a mortgage, one of the key factors that lenders look at is your credit score. Mortgage lenders typically use FICO® Scores from each of the major credit bureaus—Experian, TransUnion, and Equifax—to determine your eligibility and the terms of your loan. These scores help lenders evaluate the risk of lending you money. However, mortgage lenders often sell the loans they issue to government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, which requires them to follow specific credit scoring guidelines.

What Credit Scores Do Mortgage Lenders Use?

Mortgage lenders generally rely on classic FICO® scoring models, with slightly different versions for each credit bureau. These are commonly referred to as:

• FICO® Score 2 (Experian/Fair Isaac Risk Model v2)
• FICO® Score 5 (Equifax Beacon 5)
• FICO® Score 4 (TransUnion FICO Risk Score 04)

Lenders typically use a “tri-merge” credit report, which combines the credit reports from all three bureaus, along with the corresponding FICO® Scores. When evaluating your mortgage application, lenders may use the middle score from the three, or if you’re applying jointly, the lower of the two middle scores.

Upcoming Changes to Credit Score Requirements

In October 2022, the Federal Housing Finance Agency (FHFA) announced changes to the credit score requirements for mortgage loans. Under this new plan, lenders will be required to submit both the classic FICO® Scores and newer credit scores like FICO 10 T and VantageScore 4.0. This transition is expected to take effect in the fourth quarter of 2025, after which lenders will only be required to provide the newer scores.

Both FICO 10 T and VantageScore 4.0 offer enhanced predictive capabilities by considering additional data not included in earlier models. For example, these newer models account for trends in your credit history, such as how your credit utilization ratio changes over time, and they can even include rental payment history. Additionally, they treat medical collections differently from other types of collections, which could benefit many borrowers.

Do All Lenders Use the Same Credit Scores?

While most mortgage lenders are required to provide the classic FICO® Scores to GSEs when selling loans, there are exceptions. Some mortgages, such as non-conforming loans (e.g., jumbo loans), are not sold to the GSEs. In these cases, the lender may choose which credit scores to use when evaluating an applicant’s mortgage application.

Additionally, some lenders may test newer credit scoring models like FICO 10 T or VantageScore 4.0 to understand how they perform in mortgage lending scenarios.

What is a Good Credit Score for a Mortgage?

A higher credit score can significantly improve your chances of getting approved for a mortgage and securing a lower interest rate. However, the minimum credit score required can vary depending on the type of mortgage you are applying for. Here’s a breakdown of typical minimum credit scores for different mortgage types:

Note that government-backed loans, such as FHA, VA, and USDA loans, may have lower minimum credit score requirements. However, individual lenders might impose higher requirements. For instance, while VA loans technically don’t have a minimum credit score requirement, many lenders will require at least a 620 score.

What Else Do Lenders Consider?

Your credit score is important, but it’s not the only factor lenders consider when determining whether to approve your mortgage application. Here are a few other key elements that can influence the terms of your mortgage:

1. Credit History: Lenders will also look at your credit history, including any recent bankruptcies or foreclosures, and how you’ve managed previous debts. Issues like collection accounts or open disputes could hurt your chances of approval.
2. Employment and Income: Lenders need to know that you have a stable income. This includes reviewing your employment history and verifying your income through tax returns, pay stubs, and other documentation. Your debt-to-income (DTI) ratio, which compares your monthly income to your monthly debt obligations, is also an important factor.
3. Mortgage Reserves: Lenders want to see that you have enough liquid assets to cover mortgage payments in case of an emergency.
4. Loan-to-Value Ratio (LTV): The LTV ratio compares the amount of the mortgage to the appraised value of the home. Generally, if the LTV ratio exceeds 80%, you might be required to pay for private mortgage insurance (PMI) unless you can make a larger down payment.
5. Other Financial Factors: Lenders also consider your down payment, the loan amount, and the type of mortgage you’re applying for. Shopping around for a mortgage can help you find the best terms.

How to Improve Your Credit Score Before Applying for a Mortgage

Improving your credit score before applying for a mortgage can help you secure better loan terms. Here are a few steps you can take:

1. Pay Bills on Time: Timely payments are one of the most important factors in maintaining a good credit score. Make sure you pay all bills on time, including those that aren’t reported to the credit bureaus.
2. Reduce Credit Card Balances: Your credit utilization ratio—the amount of credit you use relative to your total available credit—is crucial. Paying down credit card balances can lower your utilization ratio, which can improve your score.
3. Avoid Opening New Credit Accounts: Opening new credit accounts can result in hard inquiries, which can temporarily lower your score. Avoid applying for new credit while you’re in the process of applying for a mortgage.

In addition to improving your credit, make sure you’re also preparing your finances for the homebuying process. Saving for a larger down payment, paying off debt, and increasing your income can all help you qualify for better mortgage terms.

Conclusion

Your credit score plays a pivotal role in your ability to qualify for a mortgage and the terms you’re offered. With changes on the horizon regarding the credit scores lenders will use, it’s important to stay informed and make adjustments to your credit and finances ahead of applying for a loan. Whether you’re applying for a conventional loan, a government-backed loan, or a jumbo loan, knowing what lenders look for and taking steps to improve your credit will put you in a stronger position as you embark on your homebuying journey.