You’re probably already aware that your credit score is going to impact the kind of mortgages available to you. This doesn’t seem too complicated. But when you realize that you have more than one credit score, it can seem harder to understand.
So which is the important score to monitor? Here’s the information you need to know to put your best foot forward when it comes to your mortgage lenders.
What’s in a Credit Score?
You may not know that your credit scores are calculated based on three separate credit reports. These credit reports come from Experian, Equifax, and TransUnion—our three national credit bureaus.
If you look at these reports side by side, you may notice they aren’t identical. That’s because each credit bureau has slightly different information about you. Discrepancies between reports can cause you to have three different credit scores and leave you wondering which score is the one that will matter most to your mortgage lender.
History of the Credit Score
Credit scores originated as an informal assessment of character. This could be good for you if you had incredible charisma but a spotty payment history. It wasn’t so great for those who had an impeccable payment record but just didn’t come across as likable.
Instituting a formal credit score system helped remove those variables that don’t matter—and brought those that do to the forefront.
Bill Fair and Earl Isaac were responsible for the first real formula used to determine credit scores. This engineer/mathematician team created a scoring system that would become known as the FICO score (Fair Isaac Corporation).
Today, the term FICO score is frequently used interchangeably with credit score. But the readily available free credit scores you can receive online are different from an official FICO score.
Lenders began to apply the FICO scoring method in the late 1980s. Since then, the formula has been updated several times to reflect changing times and monetary values.
Today, nearly 90 percent of lenders turn to FICO scores to determine whether you’re eligible for a mortgage. The FICO score that lenders use the most often is version 8. Fico Score 9 has since been released, but it’s not yet readily used.
There are multiple formulas in use to determine the different credit scores. It’s possible your free credit scores may be close to the FICO scores. However, variations in formulas can result in significantly different scores.
Do your free credit scores show that you’re on the cusp of eligibility? It may be best to pay for your official FICO score in that case. This will give you a clearer picture of where you stand.
What Credit Score Matters Most to Mortgage Lenders?
The short answer is that all your credit scores matter. How the mortgage lenders come to determine your particular eligibility for financing depends on each score. The individual scores will shape how your lender-to-be uses them to determine your lending risk.
If two of your three scores are the same, this will be the credit score mortgage lenders initially assign you. It does not matter to mortgage lenders if this score is higher or lower than the final score.
If you have three unique credit scores from the three credit bureaus, mortgage lenders will assign you the middle number. This can be especially helpful if you have one low score but damaging if you have one that’s quite high.
This is a relatively straightforward process if you are applying for a mortgage as a single individual. When you apply with another person—such as a spouse—both of you will need good credit scores.
When you’re applying with a co-borrower, the mortgage lender will look at your credit scores individually in the same way. Once they’ve determined your scores, they will use the lower score of the two applicants as their barometer.
Is there a significant discrepancy between the two applicants’ credit scores? You may want to consider securing financing for the person with the better score. This may open better housing and lending options and terms for you.
What Happens When There isn’t a Score?
FICO scores require that at least one credit account be opened for six months or more. What if you haven’t had any accounts open long enough to establish a credit score? In that case aren’t likely to qualify for a mortgage.
While there are occasions where such an applicant will still be financed, this doesn’t happen regularly. If this is your situation, an individual assessment will be best. Call your preferred mortgage lender to determine what options are available to you.
There are also times where an applicant may not have all three scores available to source from. When this happens, mortgage lenders will look to your lower credit score to determine your lending risk.
Do you have only one available score from the national credit bureaus? That score will then be the sole one your mortgage lender uses to determine eligibility.
Are Credit Scores All That Matter?
Your credit score is certainly a major factor when determining whether a lender will finance a home purchase for you.
Lenders will also consider how much money you are putting toward the home purchase. The greater the down payment, the less they’ll need to finance. In turn, the lower the amount of the loan, the less risk there is to the company.
Other factors that determine your eligibility include loan terms, employment history, any collateral, and your liquid assets. Your credit scores can be a great indicator of how you handle your money. These other factors can easily help tip a mortgage in your favor.
Do you expect to be looking for financing in the near future? Here are some things you can do to make yourself competitive.
- Keep yourself employed—the longer you’re employed, the better. Keep in mind that part-time jobs may not count as an income source unless you’ve been employed for multiple years.
- Live beneath your means—lenders love to see you have liquid assets available just in case it’s needed. Knowing that unexpected hardships won’t interrupt your monthly mortgage payment is very attractive to lenders.
- Education and earning potential—your current income will be a factor, but your lender will know what your future earning potential is as well. College or graduate degrees can make you a more attractive borrower.
- How long you’ve been in your residence—the more stable and consistent you appear to your lender, the better. This indicates you’ve been great at paying your rent on time. Your lender-to-be will expect that this will continue with your mortgage payments as well.
Boosting Your Credit Score
At the end of the day, you shouldn’t have to worry about which credit score(s) your lender looks at. All of your credit scores should be kept in their best possible condition.
If you’re looking for ways to boost your credit score, start here.
- Make your payments on time if you can, pay ahead of schedule and more than the required minimum. This will show your lenders that you’re fiscally responsible and actively working off your debts.
- Pay off existing credit cards—even if the balance isn’t high, now’s the time to get rid of it. Fewer debts look better on your credit history.
- Keep your debt to available credit ratio healthy. It’s best to keep your credit usage at less than 30 percent.
- Don’t make large purchases—especially on a whim. You want your lenders to look at you as steady and stable.
- Avoid opening new lines of credit directly before you seek financing.
Keeping your credit score healthy can help land you the financing you need when it’s time to buy a house.
Now you know what mortgage lenders are going to be looking for in your credit history. It’s up to you to do what you can to be an attractive borrower.
Small changes can make a big impact; start managing your credit score today. Before you know it, you won’t need to be concerned about which credit score your mortgage lender is looking at. All of your scores will be looking good.
About the Author:
John Blakely has had a passion for all things personal finance for over a decade. He is a firm believer in having big financial dreams and executing on a plan to realize them. He is an Education Ambassador for ScoreSense, where you can find more of his writings.