Which credit score do home lenders use

Your credit score is just one element that goes into a lender’s approval of your mortgage. Here are some other things lenders look at.

1. Debt-To-Income Ratio

Debt-to-income ratio, or DTI, is the percentage of your gross monthly income that goes toward paying off debt. Again, having less debt in relation to your income makes you less risky to the lender, which means you’re able to safely borrow more on your mortgage.

To find your DTI, divide the amount of recurring debt (credit cards, student loans, car payments, etc.) you have by your monthly income. Here’s an example:

If your debt is $1,000 per month and your monthly income is $3,000, your DTI is $1,000 / $3,000 = 0.33, or 33%.

It’s to your advantage to aim for a DTI of 50% or lower; the lower your DTI, the better chance you have at being offered a lower interest rate.

2. Loan-To-Value Ratio

The loan-to-value ratio (LTV) is used by lenders to assess their risk in lending to you. It’s the loan amount divided by the house purchase price.

For example, let’s say you buy a home for $150,000 and take out a mortgage loan for $120,000. Your LTV would be 80%. As you pay off more of your loan, your LTV decreases. A higher LTV is riskier for your lender because it means your loan covers a majority of the home’s cost.

LTV decreases when your down payment increases. Going off the example we’ve just used, if you get a mortgage of $110,000 instead because you put down $40,000 ($10,000 more than before), your LTV is now 0.73, or 73%.

Different lenders accept different LTV ranges, but it’s best if your ratio is 80% or less. If your LTV is greater than 80%, you may be required to pay a form of mortgage insurance . Keep in mind that this varies by loan type and some loans, like VA loans, may allow you to finance the full purchase price of the house without you having to pay mortgage insurance.

3. Income And Assets

Your lender wants to be sure that you maintain steady employment. Lenders often ask for 2 years of proof of income and assets. The steadiness of your income could affect the interest rate you’re offered.

After you’ve determined that you’re ready to buy a home, you need to understand how lenders see you. Lenders will determine your credit-worthiness based on your FICO® scores.

By getting your FICO® scores, you can be sure that you know the kind of loan offers you should be receiving before lenders present you with numbers.

FICO® scores are the credit scores most lenders use to determine your credit risk and the interest rate you will be charged. You have three FICO® scores, one for each of the three credit bureaus – Experian, TransUnion and Equifax. Each score is based on information the credit bureau keeps on file about you. As this information changes, your FICO® score tends to change as well.

If you don’t think that your FICO® scores are important, think again. The interest rate you can expect to pay for a loan is dependent on these scores. The difference between a FICO® score of 620 and 760 can often be tens of thousands of dollars over the life of your loan. A low score can cost you money each month or even cause the home you want to be unaffordable.

Basically, the higher your FICO® scores the less you can expect to pay for your loan. For example, on a $216,000 30-year, fixed-rate mortgage:

As you can see in this example using today’s national rates, a person with a FICO® score of 760 or better will pay $229 less per month for a $216,000 30-year, fixed-rate mortgage than a person with a FICO® score of 620 – that’s a savings of $2,748 per year. You can see how essential it is to get your FICO scores in the higher ranges if they are low, and also how important it is to keep them high if they are good.

Even if you think your FICO® scores are fine, there may be errors on your credit report that you’ll want to clear up before applying for a home loan. Addressing errors before you begin the process may be annoying, but dealing with them while you’re in the middle of trying to buy a home will be downright infuriating.

Most lenders use FICO® scores from all three credit bureaus when evaluating your loan application. Your score will likely be different for each credit bureau and there may be errors on one that don’t appear on the others. When you apply for a loan, do it with the peace of mind of knowing how you’ll be viewed by lenders.

Credit scores give lenders an idea of your creditworthiness. They are one of the primary factors that lenders look at to determine whether or not to extend credit to you. While this may seem simple enough, most consumers don't know that there isn't just one credit score. In fact, there are multiple credit scores that different creditors use to evaluate credit applications.

Most lenders look at a borrower’s FICO score. And even FICO scores come in different shapes and sizes. We examine two of these: the FICO Score 5 and FICO Score 8. Both are used by lenders to determine your creditworthiness. But FICO 5 is commonly used in the mortgage lending industry while FICO 8 is mainly used by credit card issuers. FICO 5 is used with Equifax but FICO 8 is used across all three major credit bureaus.

Key Takeaways

• Credit scores come in many shapes and sizes, including the FICO Score, which has many variations.
• FICO Score 5 is an older version that is commonly used in the mortgage and auto loan lending industries.
• FICO Score 8 was introduced in 2009 and is mainly used by credit card issuers.
• FICO 5 uses information from Equifax while FICO 8 takes information from all three credit reporting agencies.
• FICO 5 is more comprehensive as it includes employment and residential history along with detailed collection items while FICO 8 is more forgiving on one-off late payments.

FICO Score 5

FICO Score 5 is a FICO Score model that is commonly used by lenders in the mortgage and auto loan industry. Your FICO 5 score includes standard credit-related information that you'd come to expect with your credit history, including your:

• Payment history (35%)
• Accounts under your name (30%)
• Credit history length (15%)
• New credit (10%)
• Credit mix (10%)
  

But that's not all. FICO 5 goes beyond these factors to include other information, such as your employment history, medical accounts, and residential history. Since mortgages are very large loans, lenders tend to be more cautious with them. As such, lenders, especially banks, rely on FICO 5 rather than other versions because it is less forgiving of unpaid collection accounts.

People who pay their bills regularly and on time, have a reasonable number of open accounts, have an established credit history, and a good mix of credit with new credit have higher scores. Low scores are associated with people who miss payments, have collection accounts, don't have enough credit, and have a newer credit history.

This score comes exclusively from the credit reporting agency Equifax, which is one of the three major credit bureaus. They may also pull your FICO Score 2 and FICO Score 4 (which are similar to FICO 5) from Experian and TransUnion, respectively. All of this information is compiled into what is called a residential mortgage credit report. The lender typically uses the number that falls in the middle of all three scores when it makes its decision.

Different versions exist because FICO has periodically updated its calculation methods over its 25-plus-year history. Every new version is released to the market and made available for all lenders to use, but it is up to each lender to determine if and when to implement an upgrade to the latest version.

FICO Score 8

FICO 8 was introduced in 2009. According to FICO, the system works consistently with older models of the score. But it comes with some unique features that make FICO 8 “a more predictive score” than prior versions.

It is the score most commonly used by credit card issuers. So when you apply for a credit card, the company generally pulls a FICO 8, which it can get from any of the three major credit reporting agencies. Like all other FICO scores, FICO 8 conveys how responsibly and effectively you interact with debt:

• Scores tend to be higher for those who pay their bills on time, keep low credit card balances, and only open new accounts for targeted purchases.
• Lower scores are attributed to those who are frequently delinquent, over-leveraged, or frivolous in credit decisions. It also completely ignores collection accounts in which the original balance is less than $100.

The additions to FICO 8 include increased sensitivity to highly utilized credit cards. This means that low credit card balances on active cards can more positively influence a borrower’s score. The score also treats isolated late payments more judiciously than past versions, so FICO 8 can be forgiving if your that late payment last year was a one-off occurrence and all your other accounts are in good standing.

FICO 8 also divides consumers into more categories to provide a better statistical representation of risk. The primary purpose of this change was to keep borrowers with little to no credit history from being graded on the same curve as those with robust credit histories.

Key Differences

Let's reiterate some of the differences that we noted above:

• FICO 5 is more likely to be used by mortgage lenders (and, in some cases, institutions that issue auto loans) because it is less forgiving of unpaid collection accounts—particularly medical. FICO 8, on the other hand, is a score that acquires increased importance in loaning large sums of money.
• FICO 8 is more popular and more commonly used than the FICO Score 5, especially when it comes to credit card companies. This is partly because FICO 8 is highly sensitive to large credit card balances that are close to the card’s limit. It is also tougher on repeated late payments than FICO 5.
• FICO 5 relies solely on data from the credit reporting agency Equifax while FICO 8 uses data from all three credit reporting agencies—TransUnion, Experian, and Equifax.
• FICO 8 has a better tolerance to infrequent late payments, especially those that are one-off, than older FICO scores like FICO 5. This is true provided all your other accounts are in good standing and up to date.

One of the main differences that we didn't discuss above is that FICO 8 is a newer version of the score along with the FICO 9, which isn't very widely used. FICO 5, though, is one of the older versions of the score just like FICO 2 and FICO 4.

Special Considerations

There is another distinction between normal or base FICO scores and industry-specific FICO scores. Base versions, such as FICO 8, are “designed to predict the likelihood of not paying as agreed in the future on any credit obligation.” Industry-specific FICO scores single out a specific type of credit obligation, such as a car loan or mortgage.

There are multiple versions of FICO 5, including one each for mortgages, automobiles, and credit cards. Lenders rely on the industry-specific FICO rather than the base version. If a consumer applies for a car loan, then their FICO 5 auto score may be more important than either their base FICO 8 or FICO 5.

What FICO Score Is Used for Mortgages?

The most commonly used FICO Score in the mortgage-lending industry is the FICO Score 5. According to FICO, the majority of lenders pull credit histories from all three credit reporting agencies as they evaluate mortgage applications. Mortgage lenders may also use FICO Score 2 or FICO Score 4 in their decisions as well.

What Is a Good FICO Score 8?

FICO Score 8 is the most commonly used FICO credit score among lenders in the financial industry. This score ranges anywhere between 300 and 850. A FICO Score 8 score of at least 700 is generally considered good. But a good score may be higher as different lenders have their own criteria.

What Indicator Drives a FICO Score the Most?

There are a number of different factors that affect your FICO Score. Your payment history is the factor that has the most impact, making up 35% of your total FICO Score. Lenders want to know whether you've paid your existing accounts on time, which helps them determine how much risk they will assume by approving your credit application.

What FICO scores do mortgage lenders use?

Which credit score is most used by lenders?

What credit score is used for a house?

What credit score does a lender determine?