Your credit score helps lenders decide whether you're likely to repay a home loan. It's a key risk-assessment factor that affects loan features such as the down payment requirement on a purchase, the minimum equity for a refinance, and your interest rate. Lenders analyze your entire credit report and choose one representative credit score to decide the loan details.
Figuring Out the FICO
Mortgage lenders check your FICO score -- a number between 300 and 850 -- which each of the three major consumer reporting agencies, or bureaus, generate. Collectors regularly report your credit activity, such as payments -- or lack thereof -- credit use, and new or closed accounts to the bureaus. Equifax, Experian and TransUnion individually develop a score based on this information. Because creditors may report to a single bureau rather than all three, and report at different times, each bureau can produce a unique score. As a result, most consumers have three different credit scores when a mortgage lender checks their credit.
The Credit Report Standard
Mortgage lenders pull a tri-merged credit report known as a residential mortgage credit report, which differs from the credit reports used for other forms of consumer credit, such as auto financing or credit cards. A third-party company, known as a repository, gathers, records and updates financial and public information, such as judgment, bankruptcy and foreclosure information, and reports it in a single comprehensive and easy-to-read format. Mortgage lenders buy your three credit scores and the corresponding credit history from the repository, and may pass the credit report fee on to you.
Three's A Crowd
Your lender uses the middle of your three FICO scores, rather than the highest or lowest, to make lending decisions. When a borrower's has two FICO scores that are identical, the lender uses that score. For example, on a tri-merged report that lists a 620 and two 645 scores, the lender uses the 645 score. When more than one borrower applies, the lender bases its decision on the lowest middle score among all of the FICO scores submitted. For example, the lender uses a 620 score when two co-borrowers have middle scores of 620 and 700.
Savvy borrowers check their credit before allowing a mortgage lender to pull it. You can identify and correct erroneous information and pinpoint ways to improve your score if needed. You are entitled to a free credit report every 12 months, but you can't use this report to apply for a mortgage. The lender pulls a residential mortgage credit report at the time of application and usually checks your credit again before closing. Lenders check credit more than once during a transaction to ensure that your credit score remains at an acceptable level.
- Department of Housing and Urban Development: Mortgagee Letter 1988-08: Standards for Residential Mortgage Credit Reports
- Mint.com: How Mortgage Lenders Gather Your Credit Data
- MSN: Which FICO Scores Do Lenders Use?
- myFICO: Your FICO Score Determines Your Rate When Refinancing
- Credit Karma. "Terms of Service: 3.3 Educational Purposes." Accessed Feb. 8, 2020.
- Consumer Financial Protection Bureau. "My Credit Application Was Denied Because of My Credit Report. What Can I Do?" Accessed Feb. 8, 2020.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.