Association of Military Banks of America

National Homeownership Month:  Which Credit Score Do Mortgage Lenders Use?

By Amy Miller, AFC®

National Homeownership Month is designated as a time to recognize the value of homeownership for American families. Homeownership is considered part of the American Dream and a way to build financial stability and wealth. For the month of June, we’ll be covering topics related to housing and homeownership.

An estimated 30% of active-duty military families and 15% of Veteran families plan on purchasing a home in 2023, leading many to start preparing their finances and credit reports to qualify for a mortgage loan.

Banks use different credit scoring models when evaluating applicants for a mortgage. Below, we’ll go over the FICO scoring model and what you need to know about industry-specific credit scores that are used when purchasing a home.

FICO Scoring Model

FICO scores were introduced to lenders in 1989 by the Fair Isaac Corporation to simplify and shorten the lending process for both lenders and consumers. The FICO Scoring system is designed to measure the risk a lender will take when granting a credit product or loan. Before this scoring model was introduced, there was no standard system for consumer lending.

FICO Score Use

The FICO scoring model is used by approximately 90% of banks and lenders and is based on consumer information reported to the three major credit reporting agencies – Equifax, Experian, and TransUnion (known as the Big Three). Base FICO scores range from 300-850 and offer lenders a quick glimpse at a borrower’s creditworthiness.

Industry-specific FICO scores range from 250-900 and are designed for specific types of loans, like a mortgage, auto loan, or credit card.  FICO scores can vary depending on the credit reporting agency, the type of score being used, and when the score was calculated. Credit scores can impact approval as well as interest rates and fees charged to a consumer.

FICO Score Versions

Because FICO updates its scoring model from time to time to reflect changes in consumer behavior, several versions exist. Lenders choose when (and if) they will adopt and use the latest version. Therefore, different lenders may be using different scores.  

Currently, the most widely used score is FICO 8, which uses information from all three credit reporting agencies. FICO 8 includes residency information along with employment history. This scoring model is more forgiving of consumer errors such as one-time late payments, but it also treats collections and frequent late payments more harshly than some other versions. It is also more sensitive to high credit balances.

FICO has created different mortgage scoring models for each of the Big Three. These industry-specific scores are created based on data reported by that specific agency.

The following scoring models are used for mortgages:

            Equifax             FICO 5

            Experian           FICO 2

            Transunion        FICO 4

To determine customer creditworthiness, banks and mortgage lenders will pull all three bureaus’ scores into what is called a tri-merge. Unless the highest and lowest scores are the same, the median score will be used as the “qualifier.”  If applying jointly with someone else, that person’s scores are pulled as well. The bank will determine the median score for each applicant and then use the lowest of the two.

Preparing Your Report & Score for a Mortgage

For all three agencies, Equifax, Experian, and Transunion, scores are created based on the information reported by that agency and are weighted as follows:

35%      Payment History – how well debts/monthly payments are paid

30%      Credit Utilization – Balances vs. Credit limit  

15%      Length of Credit History – how long accounts have been established  

10%      New Credit – number of new accounts opened

10%      Credit Mix – the type of open accounts/trade lines

Preparing your credit beforehand is key to ensuring better loan terms. In addition to making all payments on time, handling any past dues payments, charge-offs, and collections should be a priority. Keeping balances at or below 30% utilization and limiting new loans or credit lines are also key steps in preparing to apply for a mortgage.

Checking Your Score

Although 90% of lenders use the FICO scoring model, there are some exceptions.  It may help to find out which credit-scoring model will be used to evaluate your creditworthiness and work toward improving your score to meet its requirements.

Unfortunately, most free monitoring services will only provide the FICO 8 score. All three credit bureaus offer advanced credit monitoring services that will provide different versions of your score; however, there are fees associated with each. You can find more information on each on their websites:  Equifax, Experian, and TransUnion.

If you’ve taken all the steps to prepare your credit, check out our tips on choosing a lender. We also encourage you to search our membership directory where you can find a list of the many AMBA member banks offering mortgages.