Which FICO Scores Do Mortgage Lenders Use?

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As I’ve mentioned before, I’ve been on a refinancing binge. My wife and I have refinanced our home twice in the last 12 months, and my business partner and I are doing the same with three rental properties. With mortgage rates at an all time low, these deals were just too good to pass up. And this got me to thinking–which credit scores do mortgage lenders use to qualify people for a mortgage?

It’s an important question, as your credit score determines your mortgage rates or if you even qualify for a loan. While it’s common knowledge that mortgage lenders use FICO scores, most people with a credit history have three FICO scores, one from each of the three national credit bureaus (Experian, Equifax, and TransUnion). Do lenders average the three scores, or take some other approach? And what happens when two people buy a home together? Do lenders average their scores together?

So I did some research on the following questions:

  • Which FICO formula (there’s more than one, unfortunately) do mortgage companies use?
  • For a single applicant, which of up to three FICO scores will be considered?
  • For spouses, significant others, or business partners, how do lenders evaluate credit worthiness?
  • And finally, what if an applicant doesn’t have FICO scores from all three credit bureaus?

Since most loans are sold to either Freddie Mac or Fannie Mae, I focused on the requirements for these types of loans.

Which FICO Score is Used for Mortgages

Most lenders determine a borrower’s creditworthiness based on FICO® scores, a Credit Score developed by Fair Isaac Corporation (FICO™). This score tells the lender what type of credit risk you are and what your interest rate should be to reflect that risk. FICO scores have different names at each of the three major United States credit reporting companies. And there are different versions of the FICO formula. Here are the specific versions of the FICO formula used by mortgage lenders:

  • Equifax Beacon 5.0
  • Experian/Fair Isaac Risk Model v2
  • TransUnion FICO Risk Score 04

If you want to dig into the regulations for Freddie Mac and Fannie Mae to see the source of this information, you can do so here and here. But be warned, it’s like trying to drink water from a fire hose.

Lenders have identified a strong correlation between Mortgage performance and FICO Bureau scores (FICO score). FICO scores range from 300 to 850. The lower the FICO score, the greater the risk of default.

Which Score Gets Used?

Since most people have three FICO scores, one from each credit bureau, how do lenders choose which one to use?

For a FICO score to be considered “usable”, it must be based on adequate, concrete information. If there is too little information, or if the information is inaccurate, the FICO score may be deemed unusable for the mortgage underwriting process. Once the underwriter has determined if a score is usable or not, here’s how they decide which score(s) to use for an individual borrower:

  • If all three scores are different, they use the middle score
  • If two of the scores are the same, they use that score, regardless of whether the two repeated scores are higher or lower than the third score

If it helps to visualize this information:

Identifying the Underwriting Score
ExampleScore 1Score 2Score 3Underwriting Score
Borrower 1680700720700
Borrower 2640
660640640
Borrower 3640660660660

Which Scores Are Used with Two Applicants

If there is more than one applicant, then the scores to be used for each individual are calculated as described above. Once the scores for each applicant are determined, the mortgage lender uses the lower of the two credit scores.

What If No Score is Available

In some situations, an applicant may not have a usable FICO score from one of the three credit bureaus. In that case, the mortgage lender will simply use the lower of the two scores that are available. And if two scores are not usable, they will use the one remaining score.

And since you may be wondering, if a mortgage applicant has no usable FICO scores, generally they won’t qualify for a mortgage. I say generally because there are exceptions. If you fall into this category, contact a mortgage broker to see what options you have.

Obtaining FICO Scores

If you are looking to buy or refinance your mortgage, how do you get a glimpse of your credit scores before applying? Well, one option would be to sign up for FICO’s 10-day free trial of Score Watch. You’ll get your FICO score, but you’ll need to cancel before the 10 days are up, unless you want to keep the Score Watch product.

There are a number of ways to get your free credit score, which is where I’d start. They’re not perfect, but in my experience are pretty close.

Published or Updated: April 18, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Very interesting article! It’s unfortunate that FICO scores are so complicated. I would advise readers to investigate if they find out one of their scores is significantly different than the others. Could be a sign of a mistake!

  2. Usually lenders will pick the middle score as an average but this is not always the case. Some times it depends where you live. Experian, eqifax and transunion usually cover their own geographical territories.

  3. Miiockm says:

    Hmm interesting that they would use the middle score.

  4. Allison says:

    Most mortgage lenders’ guidelines require the use of the lower/lowest of the borrowers’ middle scores. However, we have a couple of of lenders we sell to that will use the higher-earning borrower’s middle score.

    You are right that those scores you get free or pay for are just generic score models. Each industry – auto business, insurance, and mortgage all have industry-specific models they use to calculate borrowers’ scores.
    But seeing your score will give you a general idea of where you are in this area. Getting over certain crucial points like 680 or 720 will make your rate better or qualify you for mortgage insurance or a higher loan amount so always ask your mortgage professional if your score is a “just miss” or if they know how to help you “rescore” just a little higher with credit bureau software.

    • Rob Berger says:

      Allison, thanks for the very helpful information. The “crucial Points” like 680 and 720 is good information to have.

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