Credit Scores Used By Lenders To Qualify Mortgage Borrowers

by Gustan Cho

This Article On Credit Scores Used By Lenders To Qualify Mortgage Borrowers

Credit scores is one of the most important factors during the qualification and pre-approval process. Credit scores determine whether a borrower qualifies for a mortgage. All mortgage programs have a minimum credit score requirement. For example, HUD, the parent of FHA,  requires a 580 credit score for a 3.5% down payment home purchase FHA loan. HUD has the most lenient agency guidelines out of any mortgage program when it comes to bad credit and lower credit scores. HUD allows borrowers with credit scores down to 500 FICO to qualify for FHA loans. However, borrowers with under 580 FICO, you need a 10% down payment versus a 3.5% down payment. Fannie Mae and Freddie Mac require a 620 minimum credit score on conventional loans. The VA does not have a minimum credit score requirement. However, most lenders require a 620 to 640 credit score requirement on VA loans as part of their lender overlays. Credit scores also play an important role with pricing on mortgage rates. There are loan level pricing adjustments on credit scores when lenders determine mortgage rates. The higher the credit scores, the lower the risk of the borrower. The lower the risk of borrowers, the lower the credit scores. Credit scores fluctuate daily. So which credit scores do lenders use as the qualifying for borrowers?

Credit Scores Used By Lenders Versus Other Creditors

What is the credit score used by lenders compared to other creditors

There are three major credit reporting agencies:

  • Experian
  • Equifax
  • Transunion

Each credit bureau is independent of each other:

  • Each credit bureau has its own algorithm on their credit scoring model
  • Therefore, each consumer has a different credit score from each of the three major credit bureaus
  • Each of the three major credit bureaus collects data from creditors who report consumer overall financial profile

Data And Information Of Consumers On Credit Bureaus

Credit bureaus will state the following information on each consumer:

  • The name of the creditor
  • The type of credit
  • The date opened
  • The loan amount
  • The monthly payments
  • The terms of the loan and/or credit
  • The balance
  • Payment history as of being paid on time and/or late
  • The overall credit rating of each credit tradeline of the consumer

The Role Of The Three Giant Credit Reporting Agencies

The job of credit bureaus is to gather and collect data of consumers including public records and compile the borrower’s credit profile and give it a rating through a credit score. Credit scores range from a low of 350 to a high of 850. The higher the credit score, the higher the credit risk of the consumer. When consumers apply for credit, they will pull the applicant’s credit report through one of the three credit bureaus. Creditors will judge the qualifying credit score through the credit score they get of the consumer from Equifax, Experian, or Transunion. Normally, creditors are contracted with only one credit reporting agency. For example, when you apply for a car loan at ABC Auto Finance, the auto finance company may be contracted with Transunion. Therefore, they will just pull a Transunion credit report on all of their auto finance customers. The credit score they get from Transunion will be the qualifying credit score used on auto finance loan applicants. Most credit card companies, auto finance companies, and other creditors will just use the credit score from one of the three credit bureaus they are signed up with. However, mortgage lenders will want to know borrowers’ credit scores from each of the three credit bureaus. This is because the average home mortgage loan amount is $325,000. It is a lot of risk and money at stake for lenders. Lenders will pull a tri-merger credit report on each mortgage loan applicant.

Credit Scores Used By Lenders From The Tri-Merger Credit Report

Mortgage lenders will use the FICO mortgage credit score. All mortgage loan applicants need to have a tri-merger credit report pulled by their loan officers.

A tri-merger credit report is when a borrower’s credit is pulled from each of the three credit bureaus:

  • Transunion
  • Experian
  • Equifax

Mortgage credit scores are a slightly different version of the industry-specific FICO Score.

How Lenders Determine The Borrower’s Ability To Repay And Willingness To Repay Their New Home Loan

How Lenders Determine The Borrower's Ability To Repay And Willingness To Repay Their New Home Loan

Lenders want to know everything about the mortgage loan applicant before extending credit. This is why they require a tri-merger credit report. Lenders request a tri-merger credit report in the event that one or two of the three credit bureaus may not report a certain credit tradeline. The mortgage credit report is similar to other FICO consumer credit reporting models. However, the mortgage credit scores have unique tweaks on their algorithms geared towards helping lenders determine the creditworthiness of mortgage loan applicants.

How Mortgage Lenders Analyze Borrowers

Mortgage loan applicants are still evaluated on the same core factors (payment history, credit use, credit mix, and age of your accounts), but the categories are weighed a little bit differently. The algorithms on the mortgage FICO credit scoring model are based on borrowers paying a home mortgage mindset versus consumers paying credit card balances and/or other credit tradelines. A mortgage is a high ticket item and most home mortgages have 30-year payment plans. Lenders want to know the borrower has the ability to repay and the willingness to repay.

The Ability To Repay

The ability to repay is determined by the income of the borrower but the willingness to repay is determined by the payment history of the borrower from the past payment history on their credit report. Lenders pull all three credit reports through a tri-merger credit pull. However, lenders only use one credit score as the qualifying credit score on a home mortgage. All lenders will use the middle credit score from the tri-merger credit report. Whatever credit bureau the middle credit score comes from, that is the credit used as the qualifying credit score.

Credit Scores Fluctuate Daily: Which Credit Score Is Used By Lenders As The Qualifying Credit Score

As mentioned in the earlier paragraph, mortgage lenders will use the middle credit score of a borrower’s tri-merger credit report. This holds true no matter which credit bureau the middle credit score comes from. Credit scores fluctuate daily. A mortgage loan application can have 10, 20, 30, 50 points swings on their credit scores. So, which credit score do lenders use as the qualifying credit score. An experienced loan officer will prepare their borrowers in maximizing their credit scores prior to pulling their tri-merger credit reports.

How To Boost And Maximize Your Credit Scores

There are some simple tricks of the trade-in maximizing your credit scores. Examples of maximizing your credit scores are paying down your credit cards to a ten percent utilization ratio. Those who do not have any active credit tradelines should get three to five secured credit cards with at least a $500 credit limit. If you cannot afford to get three to five secured credit cards with a $500 credit limit, just get one or two with a $200 credit limit. Anything is better than nothing. The team at Capital Lending Network, Inc. are experts in helping borrowers improve and boost their credit scores to qualify for a mortgage. It is not if you qualify for a mortgage but when you qualify at Capital Lending Network, Inc. Capital Lending Network, Inc. is a mortgage company licensed in multiple states with no lender overlays on government and conventional loans. Unlike other mortgage companies, we do not just offer government and conventional loans but have a national reputation of being a one-stop mortgage shop due to the dozens of non-QM mortgage loan programs we offer. We have a network of lending partnerships with over 50 wholesale lending partners including dozens of non-QM and alternative lending investors.


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Jenny Malconi December 6, 2020 - 5:15 pm

Have outstanding collection accounts was wondering if I could still qualify for FHA mortgage?

Vicki Mueller December 6, 2020 - 5:16 pm

Need to refinance. My current credit score is 590 the property is valued at 425K but I owe 200k to the banks, I would like to cash out and lower my monthly payments (analysis done). I have already started cleaning up my credit, but I have read that your team of experts can help me expedite the process. I am open to further discuss. Thanks.

Julio Gringatomas December 6, 2020 - 5:19 pm

We have bankruptcy discharge in 2015 and late payments in 2017 for a closed account. Seeking to purchase a home and need help! Every lender I contacted told me I cannot qualify for a mortgage with any late payments after bankruptcy

Jack Vargas December 6, 2020 - 5:20 pm

I want to purchase a home. Have a chapter that was dismissed in 2015 and 2019 on my TransUnion report. I have a closed collection for 5,500 with Verizon wireless. My credit score is 638 TU and 644 with Experian. The home I want to purchase is 299,000 but will offer 270,000. I have down payment ready to go.

Javier Lopez December 6, 2020 - 5:31 pm

I was referred to Gustan Cho Associates by my brothers Julio and Antonio and was told you can help me. I tried calling but it went to voicemail. I have close to $85,000 saved and can show in my bank account but I do not want to use it on a home purchase. I need this money for a business venture with Julio together for a project we have been working on for business that cannot be used for business. I am interested in a owner occupied home loan either FHA or 5% Conventional. I read both articles on the benefits for both. The property I am interested in is a duplex in Chicago, Illinois with one of the units rented.. My question is if the rental income can be used calculating the DTI ratio.? I am self-employed and make good income but declare a lot of expenses. I can have my brother co-sign but he is the same with me and self-employed. My wife works but works part-time and so does my brother’s wife. I was told they both need a two year part time employment history. I just sent an email mortgage inquiry so if you can get back to me. I found this house that I want to put an offer on.

Javier Lopez December 6, 2020 - 5:32 pm

Can I do a bank statement loan? I am self employed with my brothers.

Dianne December 6, 2020 - 11:01 pm

My husband bought a property from his boss in June 2005 and let the property slide. I have not heard of anything from the bank or anyone. How can I find out whether or not the property has been foreclosed? My husband cannot ask his ex boss the seller because of him being in bad terms with her. I was a commercial building and want to see whether it will affect my husband from qualifying for a home loan now. We have not gotten served or even gotten any notice from anyone.

Cathie Stritch December 6, 2020 - 11:14 pm

Veteran with income over $150k annually that had recent VA related illness that caused severe damage to credit during recovery while temporarily unemployed.

Dana Kelly December 7, 2020 - 1:52 am

How much down payment do I need for multi family 2-4 units for an investment property. How much cash do I need to have to qualify. My credit score is 728.


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