You might be surprised when you apply for a loan and your mortgage lender provides you with a different set of credit scores if you are using a free credit monitoring service and believe you know what your credit score is.
Due to the fact that lenders use a variety of credit scoring models, this may occur. There are actually 16 different FICO Scores, and there are numerous variations of each score.
In an effort to provide lenders with the knowledge they need to approve your home loan application, each credit scoring model interprets the data in your credit profile differently. When evaluating applicants, the majority of mortgage lenders use the FICO Credit Scores 2, 4, or 5.
Mortgage companies that provide conventional mortgages are required to evaluate your loan application for approval using a FICO Score. The specific scores used by each bureau are as follows:
These credit scoring systems are all from FICO, which is the provider used by more than 90% of lenders. Given that you might be applying for a loan with a minimum credit score requirement, such as an FHA loan or a VA loan, it’s critical to understand which model your lender will employ.
If you’re requesting that kind of loan, you must have a mortgage score that satisfies or exceeds that standard. It won’t matter if your credit score does not satisfy the requirements even if it would in accordance with another scoring model used by the lender.
Why Are There Different FICO Scores?
There are numerous different FICO scoring models as well as some non-FICO credit scoring models, like the VantageScore credit score.
The same goal of every credit score is to provide lenders with a quick way to assess a borrower’s creditworthiness. So why are there so many different models?.
The straightforward response is that each model is created to assist lenders in assessing the credit risk associated with various types of debt. An auto lender may want to place more emphasis on certain information in your credit report because they are making a very different type of loan than a mortgage lender or a credit card company.
For instance, the lender will probably use the FICO Auto Score model, which is intended for people looking for a car loan, if you apply for an auto loan. Depending on the kind of loan you’re applying for, lenders may use other scoring models.
The FICO Bankcard Score, which emphasizes your credit utilization ratio, may be used by credit card issuers.
The good news is that each scoring model’s scores will generally be comparable. With other models, you’ll typically have a good credit score if you have a higher credit score than the majority of people when using one model.
However, depending on the model used, there are some circumstances where you might have a different credit score than anticipated. If you’re on the verge of qualifying for a loan, it’s critical to pay attention to the model the lender employs because each formula weighs factors differently.
What Else Do The Lenders Look At?
In addition to your credit history, lenders consider many other factors when you apply for a home loan.
Your income is one of the most obvious factors that lenders consider. Even with perfect credit, if you apply for a $1 million mortgage loan but only make $30,000 annually, the lender will realize that you cannot afford to repay the loan.
Contrarily, a person with a high income may have a better chance of repaying a $1 million loan, but their chances of being approved for a loan will suffer if they have bad credit.
Lenders also consider your debt-to-income ratio, which compares your monthly bill payments to your income. More money is available to you to make payments on new credit accounts the lower this ratio is.
You don’t have enough money in your budget to handle a new loan payment if your debt-to-income ratio is too high.
How Your Credit Score Impacts Your APR
The APR of your loan is significantly influenced by your credit score. Any installment loan’s APR, including a mortgage, accounts for all fees and interest paid over the course of the loan. The borrower will be required to pay more the higher the APR.
Depending on your credit score, you could pay wildly different amounts for a $250,000, 30-year mortgage, as illustrated below.
Interest Paid by FICO Score
| FICO Score | APR | Monthly Payment | Total Interest Paid |
| 760-850 | 2.596% | $1,000 | $110,1117 |
| 700-759 | 2.818% | $1,030 | $120,667 |
| 680-699 | 2.995% | $1,053 | $129,201 |
| 660-679 | 3.209% | $1,082 | $139,663 |
| 640-659 | 3.639% | $1,142 | $161,156 |
| 620-639 | 4.185% | $1,220 | $189,328 |
If your credit score is low, even a small change in your mortgage score can have a significant impact on the price of your mortgage. It might be harder to afford a mortgage if you end up paying more than 20% more each month.
How to Improve Your Credit Score Before Applying for a Mortgage
Enhancing your FICO score is one of the best things you can do if you want to buy a house in order to make the process simpler. You can take some easy steps to raise your credit score, regardless of the credit scoring model that your lender ultimately chooses to use.
Keep in mind that having a low credit score affects your ability to obtain credit as well as the interest rate that the bank or credit union will charge. Therefore, improving your credit score can lower the cost of your mortgage, making it simpler for you to afford buying a home.
There are five factors that comprise your FICO credit score:
Your mortgage interest rate will decrease with each move you make to raise your credit score, so it is well worth the effort.
Get a Credit Strong Credit Builder Loan
Getting a Credit Strong credit builder account is one of the best ways to establish a payment history. Credit Strong provides credit builder loans and is a subsidiary of an FDIC-insured bank. Specialized loan accounts known as “credit builder loans” make it simple to establish credit.
You can choose the loan’s term and monthly payment amount when you apply for a loan with Credit Strong. Credit Strong does not immediately release the funds to you. Instead, the business opens a savings account for you with the funds.
Making your regular payments enhances your credit by establishing a history of timely payments. Credit Strong will report your payments to each credit bureau.
Credit Strong will give you access to the savings account it set up for you once the loan is paid off, making the program a kind of forced savings plan that also aids in credit building.
This can still be a good option for a borrower who wants to build savings while improving their credit, even though you’ll pay a little bit more for the loan overall with interest and fees.
Credit Strong is much more flexible than some other lenders of credit builder loans, allowing you to select from a range of payment options. If you run into financial difficulties, you can also cancel your plan at any time to avoid damaging your credit by failing to make payments.
See the credit builder loan pricing and plans here.
Increase Your Available Credit
The borrower’s credit utilization ratio is something else lenders consider when determining their creditworthiness. This ratio evaluates the borrower’s overall credit limits in relation to their debt, particularly credit card debt.
Your credit utilization would be 50%, for instance, if you had one credit card with a $2,000 balance and a $4,000 credit limit. Because using all available credit on one’s credit cards can indicate a risk of default, lenders look for borrowers with lower credit utilization.
Although less than 10% is preferable, a credit utilization of 30% is good. Therefore, if you have a card with a $1,000 credit limit, you should have no more than $100 in balance on the card’s statement date in order to improve your credit score.
Therefore, lowering your credit utilization ratio is one of the simplest ways to raise your credit score. By reducing debt or raising your credit limits, you can achieve this.
Most card issuers will increase your credit limit if you’ve had a credit card for a while and have a good payment history. You can typically request an increase through your online account.
There’s no risk when requesting a credit limit increase. The worst a lender can do is refuse your loan, which would leave you back where you were. The best-case scenario is that your credit limit will be significantly increased, lowering your credit utilization ratio and instantly raising your credit score.
Dispute Errors on Your Credit Report
Reviewing your credit report is a smart idea before applying for a large loan, like a mortgage. Finding and fixing errors is one of the simplest ways to raise your credit score by 200 points.
You might be surprised to learn how frequently errors and inaccurate information are reported on your credit report by the credit bureaus. Obtaining a copy of your report gives you the chance to spot these errors and contest them.
For instance, you might discover records of a missed payment that you didn’t actually miss or an account that isn’t yours.
Every credit bureau has a different procedure for allowing people to report errors. Make sure to contact the credit bureau to dispute any errors you find on your credit report.
Your credit score could significantly increase if you are able to have a missed or late payment taken off of your record. This would increase your chances of getting a favorable interest rate on a mortgage.
Stay Away From Hard Credit Inquiries
The lender will request a copy of your credit report from one or more credit bureaus when you apply for any conventional loan or credit card. Your credit report will reflect this as a “hard inquiry” thanks to the credit bureau. ”.
Your credit score is lowered by a few points for each hard inquiry on your report. Numerous difficult questions asked quickly can significantly lower your score. This is due to the likelihood that a borrower who submits numerous loan applications quickly is experiencing financial difficulties.
Try to avoid any unnecessary hard inquiries when you’re considering applying for a large loan, especially a mortgage.
The majority of credit scoring models won’t penalize you for rate shopping, which is good news. Most models will treat all of your mortgage applications submitted over a short period of time, typically a few weeks, as a single inquiry.
How much you pay to buy a house is heavily influenced by your FICO score. You can get a better loan and pay less each month by taking steps to improve your credit score.
FAQ
What FICO score is used to buy a house?
The Experian/Fair Isaac Risk Model v2 and FICO® Score 2 are the most popular FICO® Scores for mortgage lending. FICO® Score 5, or Equifax Beacon 5. FICO® Score 4, or TransUnion FICO® Risk Score 04.
Are mortgage lenders using FICO 8?
The scoring model used in mortgage applications is as follows: FICO® Score 2 (Experian), FICO® Score 5 (Equifax), and FICO® Score 4 (TransUnion). While the FICO® 8 model is the most popular scoring model for general lending decisions, banks use the following FICO scores when you apply for a mortgage.
Do auto lenders use FICO score 8 or 2?
FICO Auto Score 8 or FICO Auto Score 9 are typically used by auto lenders. It’s the most recent and used by all three bureaus. Your FICO score will be different from your FICO Auto Score because the FICO Auto Score ranges from 250 to 900.