Lendid Home Loans Blog

How Mortgage Lenders Use Your Credit Score

how mortgage lenders use your credit score

Do you really know how mortgage lenders use your credit score when they evaluate your home loan application?

Yes, you probably know that your credit score has something to do with the mortgage process. And you most likely think you have a pretty good idea of how credit scores work.

But before you head on over to Credit Karma and think you’re ready to apply for a mortgage, stop. We’ve got news for you.

Most people have no idea exactly how mortgage lenders use their credit scores. Yes, there’s a difference. And if you want to position yourself to get the best mortgage offer and purchase your first home, or your dream home, this is the info that will give you your edge.

3 Things You Need to Know Now

Here are the three things you need to know about how your credit score affects your home loan application. Understand exactly how mortgage lenders will use your credit score and learn why a credit score could be so important for your home loan application.

  1. Different types of credit scores are used for different types of loan applications.

    When you’re applying for a mortgage, your mortgage lender will look at a totally different type of credit score than a lender would look at for your car loan or a new credit card.

    And, no, we don’t do this simply to make things even more complicated than they already seem. What makes you a good risk for borrowing the money necessary to buy your dream home just isn’t the same as what makes you a good risk for buying or leasing a car.PRO TIP: You can get your actual mortgage FICO from myfico.com.

    The credit score you get for yourself at myfico.com will be the score that we mortgage lenders see when you apply for your home loan.And that means that the credit score you see when you go to Credit Karma or your bank account or your credit card account or the myriad other sites offering you credit score data today…those scores will not help you know whether you’re ready to apply for a mortgage. Do yourself a favor and just go to myfico.com.http://www.lendidloans.com/blog/how-do-i-qualify-for-a-mortgage/

  2. Mortgage lenders look at the middle FICO score from Equifax, Transunion and Experian.

    OK, first off. If you don’t know what Equifax, Transunion, and Experian are — basically, they’re the three biggest credit bureaus in the U.S. (Did you know there are actually dozens of them?)

    What’s a credit bureau? Basically, credit bureaus are companies that collect information about your credit, plus info related to your credit.

    That info about your credit includes, of course, every account you open, as well as any other debts or major financial events (like bankruptcies). The info related to your credit includes demographic data like your address, salary, and employment history.

    The credit bureaus make their money by selling that info they’ve so diligently collected to you and the folks you want to borrow money from (mortgage lenders, creditors, etc.).

    OK. Moving on to FICO. (Itching to become a total credit bureau nerd? Check out more info over at Investopedia and the balance.)

    No, FICO is not what bankers name their adorable puppies. (Though I’m guessing at least one has, somewhere, some time.) FICO is actually a branded method for calculating your credit score.

    PRO TIP: Your middle score is what counts for your mortgage application. Don’t focus on the lowest or highest of what the big three credit bureaus show you.

    Since FICO is a specific model for calculating your credit score ..every FICO is the same, right?

    Sorry, no. Each of the major credit bureaus (yes, that’s Equifax, Transunion, and Experian) has its own sources and methods for collecting and tracking your credit data. So they’re each using the FICO model to calculate your score, but feeding that model with slightly (widely) varying data.

  3. What are those credit monitoring sites (like credit karma) good for?

    OK. If you need to go to myfico.com to get the credit score that counts for your mortgage application, and you need to focus only on the middle of the various FICO scores that the big three calculate for you, what are all those credit monitoring sites good for?

    Are they helpful at all?

    Yes! Here’s how to use those sites (like credit karma) when you’re gearing up to apply for a mortgage:

  • Monitor what’s on your credit report for accuracy.

    All sorts of stuff can go wrong on your credit report. Someone else’s accounts could show up there (either from simple error or actual fraud). You might have an account you know you paid, but it’s showing up as delinquent and hurting your score.

    And even if everything on your credit report is a thousand percent correct, you do not want to be surprised by any negatives after your friendly mortgage company has already pulled your score.

  • Watch the direction of your credit score.

    You always want to be aware of whether your FICO score is going up or sinking down. But it’s even more important to monitor that direction when you are preparing to apply for a mortgage.

    That way, if you see an upward trajectory, you know you’re on the right course and ready to apply for a home loan. And if you notice a downward spiral, you can take steps to fix it … and potentially adjust that home purchase plan or budget accordingly.

    And remember — you can pull your credit report as many times as you like without it affecting your score. But, when creditors pull your credit report, that activity can affect your score. So monitor that report all you want, and apply for that home loan when you’re ready.

    PRO TIP: You can use those free credit monitoring sites to get a general idea what your mortgage FICO score will look like. Generally, your real FICO score (the one your friendly mortgage loan officer will be looking at) will be about 20 points higher or lower than what you’re seeing on those free sites.


That’s it! You now have the power to be master of your own credit score.

Now you can go into your mortgage application process with the confidence that you know how your friendly mortgage lender will leverage that score to help make a decision about how much (or if) you can borrow.


Topics: Home Loans